Why students should pay fair

Labour stuck its head above the higher education parapet yesterday - a brave thing for a political party to do. Everyone from the vice chancellors to the National Union of Students, from parents to politicians, agrees that the current system of funding post-compulsory education is an abysmal mess: there isn't enough cash to fund expansion, incentives for teenagers to stay on need to be improved, and the distribution of the taxpayers' subsidy is completely unfair.

But, up until now, politicians from the two main parties have prevaricated about advocating alternatives. After all, these are middle-class swing voters we are talking about. No politician with a university in the constituency will be at ease provoking student ire. And parents are sensitive too: supporting a teenager through to graduation is extremely expensive thing.

It is hardly surprising then that the Government arranged for Sir Ron Dearing's review of the funding of higher education to report after - not before - the general election. Given that David Blunkett could, like government ministers, have kept mum on the issue until then, he should be congratulated for setting out Labour's stall now in a submission for the Dearing commission to consider.

So far, David Blunkett accepts that the taxpayer should continue to fund higher education fees. But student maintenance is another matter entirely. In place of the existing mish-mash of parental contributions, means-tested grants and student loans, students would take out a new, improved, bigger-than-ever loan. It would be repaid over 20 years - possibly through the National Insurance system. Mature students could, perhaps, save towards their maintenance through Labour's individual learning accounts. Sir Ron is charged with making the system progressive - and in particular with ensuring that people on long courses, such as doctors, are not penalised.

Whether or not students should pay interest on the loans remains for Sir Ron to resolve. Labour hopes private finance could be mobilised to finance the loans (despite the Government's inability to get the private sector involved in the existing student loan scheme.)

Of course, Labour has left much still to be considered, but its broad outlines represent a dramatic step in the right direction. In an education system strapped for cash, politicians need to find new ways to fund the further expansion of universities, and other investment in human capital. Getting the students themselves to contribute is as good a means as any - even if the returns may take many years to accrue. The party claims pounds 1bn could be liberated from paying student grants. But students would need to be paid their loan up front. Savings in the short term would depend on whether or not the private sector could be mobilised to finance the loans instead.

Labour's proposed reforms may encourage more teenagers to stay on; repaying a loan over 20 years is less daunting than over five - as the current student loans system demands. And anything that shifts the burden of finance away from parental contributions towards students themselves is a good thing; no teenager's decision should be affected by what their mum and dad can afford.

There is a progressive principle involved here, too. At the moment, the taxpayer invests most in educating those who will eventually become the highest earners, thanks to their qualifications. True, society and the economy benefit from having large numbers of graduates, but individuals also benefit. Graduates earn considerably more than their unqualified peers. Financial advantages continue through their lives because employers tend to train and promote those who have already been privileged in education.

It hardly seems fair that, today, a taxpaying, hard working 18-year-old effectively subsidises the higher education, and hence improved future earnings, of her more academic peers. Arguably, a really radical and progressive government would make students pay back some of their fees too, and use the money to expand vocational education instead.

But the big problem with a crude loan arrangement is that everyone has to pay back the same amount, despite the fact that the personal financial return people gain from education varies dramatically. The teacher on pounds 20,000 a year has to pay back the same amount as the investment banker on pounds 90,000. Sure, that teacher could pay the money back more slowly if she wanted too - but in the end she would still have contributed a much larger proportion of her life-time earnings than her more highly paid contemporaries.

There is an additional unfairness in all of this, namely that some of the most poorly paid graduates contribute most to the community, something the loan system does not take into account. For example, the benefits to the rest of society from educating the teacher are far greater than from educating on the investment banker, yet the loan system would treat them in the same way.

Labour is concerned about the fairness of the new funding arrangements that it has proposed and has asked Sir Ron Dearing to consider ways in which the repayments could be made progressive. One option might be to waive interest payments for the low paid. Alternatively the state could help pay back the loans of people going into key occupations that have a long training period such as doctors. Perhaps parents staying home bringing up children could also be excused some part of the repayment.

But all these arrangements seem unnecessarily complicated when compared with a simple alternative that Labour seems keen to rule out. It would be fairer to have a graduate tax (those squeamish about the word "tax" could call it an income-contingent-education contribution). Paid also through the National Insurance system, perhaps also for 20 years, this could be set at, say, 1-2 per cent of earnings, and it would be no more complicated to administer than loans.

This scheme would at least attempt to reflect the fact, albeit crudely, that graduates gain very different individual benefits from third-level education. People would pay money back in proportion to their earnings - investment bankers would pay more in total than teachers. And the children of rich parents who might otherwise have paid their loans off at once, would still have to contribute alongside those struggling to pay the whole bill themselves.

It all sounds very fair, and relatively easy to administer. So why is no one talking about it? It's easy to see why the politicians aren't happy with the idea - it sounds too much like a tax. But no one else seems to be embracing it either.

The hard truth is that in a climate in which people distrust the ways politicians and government bureaucrats spend their money, loan repayments appear to enjoy greater legitimacy than a graduate tax. Rather than paying more into a nebulous graduate tax fund run by faceless Treasury officials, individuals would have to pay for their own consumption. Students would know exactly what the money was spent on, in fact they could count the hangovers. As a result, the theory goes, it would be easier for us to accept our obligations to pay the money back. Loans encourage the idea that we must take personal responsibility for investing in our own education.

Every party is now moving towards the notion that we each have an individual contract with the state, and away from the idea that we must contribute without question, according to our ability to pay.

This is all very well. But it should not obscure the risks: under the loan system Labour advocates, fairness could be compromised. That is the price of giving the new arrangements legitimacy.