Would Vince Cable's 'graduate tax' be a fairer way for students to contribute to the cost of their degrees?

Vince Cable is a much-loved politician because he tells it like it is, he seems to know what he is talking about and he doesn't pander to people. Youngsters like him because he has a cool name that brings to mind an action movie star; oldies are keen because, well, because he's one of them.

But the university world is fast falling out of love with the Business Secretary, who has responsibility for higher education. That's because of his use of the "T" word – in other words, his mention of a graduate tax to replace top-up fees.

He has since backtracked on the "T" word, preferring to call his idea a graduate contribution scheme, but the tax idea is still around and some higher education experts, as well as delegates to this week's Lib Dem conference, are fighting hard for it. Others are fighting equally hard to knock it into the long grass.

Those in favour of a tax are on the left of the political spectrum and include the National Union of Students, some Lib Dem MPs, all the candidates for the Labour leadership except David Miliband, and the higher education think-tank Million+, which represents the new universities. Against is an impressive line-up, including the Russell Group of research-intensive universities, the 1994 group of small and beautiful universities such as Exeter and Sussex, many vice-chancellors and most experts in the field. Professor Nicholas Barr, of the London School of Economics (LSE), says a pure graduate tax, where those who have been to university pay a percentage of their earnings for ever, or until retirement, or for, say, 25 years, is a very bad idea. That's because the money would go straight into the Treasury's coffers rather than to individual universities. It would restore Soviet-style central planning to the higher education system, stifle competition between universities and lead to a possible decline in quality.

It also creates the "Mick Jagger problem". A one-time student at the LSE, Mick Jagger is a very rich man and has been making a lot of money for a long time. Under a graduate tax, someone as rich as Jagger would have to pay hundreds of thousands, and possibly millions, of pounds to the Treasury for his or her degree – much more than ordinary mortals like you and me. "In a graduate-tax regime, Mick Jagger would finance a good chunk of UK higher education," says Barr. "Compulsion, as well as encouraging emigration, will come under political attack from the right, as violating individual freedom, and hence it might not be stable – which is very important for a scheme that works over the long term."

So, why is the Business Secretary so keen on an idea that the cognoscenti pooh-poohs? The answer is simple – politics. Vince Cable has been studying the idea to get himself off a political hook. At the last election, the Lib Dems pledged to abolish tuition fees. In fact, all 57 Lib Dem MPs signed an NUS pledge to vote against an increase in tuition fees during this Parliament. Cable put his name to this pledge as did his leader, now the Deputy Prime Minister, Nick Clegg. This would have made it difficult, if not impossible, for them to accept the increase in tuition fees that was expected to be proposed by the inquiry into higher education funding, chaired by the former BP boss Lord Browne, which will report in a few weeks. Many vice-chancellors think fees need to rise to £7,000 a year, which would mean more than doubling the current charge.

The Conservatives don't have too many problems with charging for university education; Labour agreed reluctantly with the principle. But the Lib Dems have made their opposition to fees a cause célèbre – and reinforced their feelings at their annual conference this week. Meanwhile, Cable has been hard at work trying to persuade Lord Browne to look at other schemes. And the signs are that he is.

In any case, everyone agrees a fundamental reform of student funding is inevitable, as raising fees wouldn't solve anything on its own. It would increase the public subsidy to higher education because students currently borrow the money for their fees and maintenance loans at a zero real interest rate. Increasing fees on their own would mean students taking out bigger loans at greater cost to the Treasury. That is why observers believe Lord Browne should endorse the idea of raising the rate of interest on student loans. The NUS would not be against that idea (it accepts that in the current financial climate students have to make a bigger contribution). But, like Barr, it would like to see the fat-cats, graduates who have become bankers or hedge fund managers or mega pop stars, paying back more than those on more modest salaries.

So, it seems a consensus is emerging in favour of what Cable likes to call a "variable graduate contribution tied to earnings". The word "fee" has been banished, as has the word "tax". The University Alliance group of posh new universities such as Oxford Brookes and Northumbria is in favour of this. The Russell Group and 1994 Group could probably live with it, as could the NUS (though the NUS does not want to see universities able to charge different fees). The big question is whether Lib Dem MPs would be prepared to wear an increase in the amount of money students pay for their higher education in return for graduate repayments linked to earnings.

Some cynics – and many Lib Dem party members appear to be in that category – are accusing the policy wonks of playing around with the language to pull the wool over people's eyes. The fee, or tax, has effectively become a "graduate contribution". But the beauty of the phrase "graduate contribution" is that it makes the point that you pay it only after you have left university and are earning £15,000 or more, and that it's only a contribution and not the whole cost of a university education.

"Moving away from talk about fees and a tax, both of which are unhelpful, opens up neutral territory," says Libby Aston, director of the University Alliance group of universities. It also shifts the emphasis away from the word "debt". More Lib Dem MPs appear to be coming round to the idea. Their former leader, Sir Menzies Campbell, is one. But will enough support it to enable the coalition Government to put higher education on a path to sustainable funding? And will the Lib Dems be able to cock a snook at the vote for a graduate tax by its members this week?

Lucy Hodges is director of communications at the University of Buckingham

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