Student funding: U-turns, swings and roundabouts

With two changes of mind in as many months, Lucy Hodges finds the Government's critics gathering

What a mess! One minute we have a new, if unpopular, system for funding students through their degrees involving tuition fees and loans. The next minute the Prime Minister announces that that needs to change. A graduate tax is the answer. Then weeks later, we learn that the graduate tax idea has run into the sands. Who knows where we will end up now?

What a mess! One minute we have a new, if unpopular, system for funding students through their degrees involving tuition fees and loans. The next minute the Prime Minister announces that that needs to change. A graduate tax is the answer. Then weeks later, we learn that the graduate tax idea has run into the sands. Who knows where we will end up now?

Higher education could turn out to be Labour's great Achilles heel, the issue which it messed up repeatedly in botched attempts to assuage all the stakeholders – students, parents and the universities themselves. Why is the process of reforming student finance proving to be so tortured – and does it have to be like this?

The issue, remember, moved up the political agenda earlier this year. Tony Blair was devastated to learn that tuition fees, or rather student debt, turned voters off at the general election. So, he told the Labour Party conference, there would be a review of student funding. Later that same week, Lobby correspondents were briefed that a graduate tax was planned as well as the re-introduction of student grants. That was the first U-turn on student funding.

Higher education experts were amazed. A graduate tax is deeply controversial: unpopular with middle England because it hits the better-off, and unloved by universities because it would taketime for the money to come rolling in. How would universities be funded in the interim?

Although a tax has some great merits – it could raise a lot of money and would be highly redistributive – it presents practical and moral problems. How would EU students be made to pay? And wouldn't some of the highest earners simply bunk off to America, out of reach of Inland Revenue? Moreover, wouldn't the Treasury hijack the new money for hotter political issues like schools and health?

According to Professor Alan Smithers of Liverpool University, it is also unfair because it means rich graduates pay far more than poorer ones, whatever the short and long-term costs of the course they studied. The amount you pay relates only to the amount you earn, not to the kind of course you took or its length.

Labour ministers may not be particularly exercised by this point. They will care, however, about relatively low-paid graduates such as nurses having to pay more for their higher education through a graduate tax.

For all these reasons, the graduate tax has fallen from favour and the ministers labouring in the cross-departmental review have gone back to the drawing board. By all accounts they are looking around for alternatives. That is the second U-turn in two months.

Until now, the ministers, including the Chancellor Gordon Brown, the Education Secretary Estelle Morris and numerous officials in their respective departments as well as in Downing Street, have been examining four options.

One option, the first choice of the Department for Education, would have seen a graduate tax plus grants for all students to replace loans. That idea has bitten the dust because of its expense. The second involved means-tested grants for the poorest students plus a graduate tax plus student loans. This was called the hybrid option.

The third idea, favoured by the Treasury, was for grants for a select few, combined with a graduate tax and for the subsidy on the student loan interest rate to be dropped. The fourth, again proposed by the Treasury, is to have no graduate tax but extend grants for those in need and to charge students a real rate of interest on loans.

This fourth option is looking the most likely runner. It reflects some of the ideas being mooted by Wendy Piatt at the Institute for Public Policy Research, the centre-left think-tank that advises Labour. Her report on reform of student funding, "Opportunity for Whom? Options for the funding and structure of post-16 education," will be published next week and is expected to endorse the idea that students pay closer to the market rate of interest on their loans. That idea has been gaining support on the grounds that it would release a substantial pot of money for new grants and that the present subsidy gives a big break to families already comfortably off. But the National Union of Students is deeply hostile.

The president of the NUS, Owain James, cites NUS research showing that students who borrowed a total of £10,000 at university would find themselves paying back £30,000 under commercial rates of interest. "It would be really, really damaging," he says.

So, it seems we are now back to square one. The review has been delayed and is not now expected to see the light of day until January 2002. Margaret Hodge, the minister in charge of universities, is said to be deeply unhappy about it. Some of the Government's own supporters are becoming restless. One – a prominent Labour MP – said he wished ministers would stop pursuing every fad and fancy and base their decisions on evidence.

A number of questions are raised by this saga. One is: What was the Prime Minister's evidence for believing that voters were bellyaching about tuition fees and debt? Some Labour MPs say they did not encounter such discontent while out canvassing. Barry Sheerman, the Labour chairman of the Education select committee, says: "It was not my experience and I have asked a number of my colleagues whether the matter was raised on the doorsteps and they said 'no'."

Second, why were newspapers briefed on 3 October that a graduate tax would be introduced before any work had been done on it? Everyone is flummoxed by this. The answer may be that the Government's spin machine wanted to get an unpopular idea out into the public arena in the wake of 11 September, knowing it would receive minimal coverage. That is a cynical thought but it seems to have gained currency.

Whatever the answer to this, we seem to have been engaged in a rather messy exercise in open government. Professor Andrew Oswald, of Warwick University, is pleased that the graduate tax looks as though it has been dropped. So is David Rendel, the higher education spokesman for the Liberal Democrats, whose party can take a lot of the credit for discomforting the Government over the fees issue. "I think it's difficult to justify a graduate tax," he says.

l.hodges@independent.co.uk