Paying for third level – a fairer alternative to fees?

There are two widely held beliefs about paying for third level. The first is that universities cannot continue to be largely funded from general taxation, as at present. The second is that Irish universities are underfunded, and this is why they have slipped down the league tables. As a result there is a modest panic about paying for universities.

Prof. Michael Murphy, the president of UCC, in an interview with Sean Kelly (Irish Times, Nov 12th), blew on the flames, saying that “Student fees of at least €4,500-€5,000 per year are necessary to maintain the quality of higher education in Ireland” and “as graduates gained a significant income premium from their degree, it was right that those who can afford to pay fees be asked to make a more significant contribution.”

Prof. Murphy is of course right about the income premium. OECD figures for Ireland up to 2004, suggest that graduates, as compared with someone who only completes secondary school, can earn 30% to 70% more. More recent Irish data are not available, but the more recent figures for other OECD states are similar. These figures are for extra earnings across a working lifetime (20 to 64).

How do we pay for third-level education now? It’s hard to get a good picture of the finances of the whole sector, and there are big differences between institutions, especially between the ITs and the universities. The HEA pay the bulk of the costs, apparently 65% to 90%+, depending on the institution. They paid just under €1.35 billion in ordinary grants to all third level institutions in 2009. Of this €769 million went to the university sector. Student ‘registration fees’, now running at €2,000 a year, are said to pay about half the costs of ‘direct student services’, a rather vague term.

Income from research grants, campus companies, patent licensing, conferences, accommodation, catering, rental income, and other university enterprises, makes up the rest. It is not clear whether these other activities even cover their own costs, as there are weak costing and management information systems in the sector. In any event, the bulk of funding comes direct, as a per-capita grant, from HEA, i.e. from general taxation, and so, non-graduates subsidize graduates. This seems unfair, as Prof. Murphy rightly suggests.

The return of fees is touted as a solution. Our neighbours in England have just brought in fees of £9,000 a year, and got a 12 % drop in applications to third level. They do have an efficient scheme of student loans, where repayments are deducted directly from salaries, once the student earns above a modest level, and interest rates are subsidized. The US has an odd system, with very high fees, student loans, and default rates running at 10% overall, and up to 80% in the worst of the private colleges (think mortgage misselling tactics applied to degrees). Most other EU countries have either no fees, or modest fees. We have nothing.

What would bringing in fees do? This would help to fix the funding gap in the sector, although to do this they would need to be closer to €10,000 or €12,000, than the figures of €3,000 to €4,000 being discussed. This would throw much of the burden on current students, and their families. Students entering in the next few years seem likely to be hit for fees. Those whose families can afford it, will graduate with few debts. Those whose families cannot, will either not go, as the recent English experience suggests, or will take on significant debts to do so.

Assuming we develop a system more like England than the US, these students will then repay their loans over 20 to 30 years, by direct deduction from their salaries. Older graduates, like me, would pay nothing for our education. We have already benefited from third level education, which received significant public subsidies, and, in many cases, our parents paid the fees.

Wouldn’t it be better to think of a graduate tax? The effect of this would be similar to a loan repayment deducted from salary, but a lot more people would contribute, so it would spread the costs more fairly. Every graduate earning above a set level would pay, and it would be deducted directly, like PRSI, and the universal social charge. No costly new systems would be required, and the administrative costs of tracking 40,000 graduates a year, across the world, for twenty or thirty years, would be avoided. There would be a once-off cost for registering graduates, but this would not be too hard. The tax would cover all graduates, whether of Irish, or foreign, third level institutions. This would ensure that all graduates would contribute to the costs of third level education.

This might be seen to be unfair to older graduates, as students paid tuition fees up to 1996. However, most graduates under the age of sixty have benefited from significant public subsidies to third level, which have been a feature of the Irish system since the late 1960’s, so it seems fair that we should contribute now.

What rate of tax would be needed to raise €2 billion a year? A rough estimate can be made. In 2010 the top 1% of income earners paid 25% of income tax, the top 8% paid 60% of of the tax, and the top 21% 83% of the tax. In 2010 it was estimated, by the Dept. of Finance, that a 1% rise in the health levy would raise €600m. If we assume the same ratio applies, then 21% of the population paying a 3% levy would raise €1.4 billion.

This suggests that a graduate tax paid at zero for low earning graduates (e.g. under €30,000), 2% for lower earners (e.g under €50,000), and 3% for higher earners would pay for Irish third level into the foreseeable future. These are not trivial sums, but they are not especially onerous either. In the UK new graduates now pay up to 9% of their income for up to 25 years to repay their loans.

There is a major effort to bounce us into bringing back student fees, but it’s not too late to change our minds. There are better, cheaper, and fairer options, and a graduate tax is one.

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