A graduate tax might be the fairest way to fund a university education

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The record number of university applications this year is a welcome sign that higher education in this country is still prized. It is also heartening evidence that the widely unpopular system of student loans is not the deterrent to seeking a university place that many had forecast. The increase presages a busy few weeks for the Universities and Colleges Admissions Service, which will publish its list of clearing vacancies in this newspaper later this week.

Along with reasons for satisfaction, however, the latest figures also throw up some grounds for concern and offer some pointers for the re-think about higher education funding that the Government has promised.

The number of university applicants has risen overall by 2.5 per cent, by far the largest rise has been among mature students. That is laudable – evidence that the provision of loans is encouraging people into higher education who would not have qualified for a grant under the old system. Not only have opportunities been expanded, but the student community will be more diverse, in age and social make-up, than ever before.

The rise in the number of school-leavers applying to go to university, however, has been far less impressive; just 1.9 per cent, compared with 6.5 per cent for the older group, which places a big question mark over the feasibility of the Government's aim to have 50 per cent of all school-leavers going on to some form of higher education by the end of the decade. It also raises the question of how many more young people might opt for a university education if they did not fear the prospect of being hobbled by debt well into middle age.

The deterrent effect of the loan system should not be dismissed, just because the number of applicants is up this year. It is impossible to divine, for instance, how much the increase reflects an upturn in the popularity of higher education, and how far it reflects a decline in money-making opportunities for non-graduates. Cutbacks in the financial sector and the meltdown of the dot.coms may well have encouraged more high-flying school-leavers to ensure their future with a paper qualification first.

The argument for loans has been two-fold: that the grant system was financially unsustainable and over-rigid, and that loans provided a "level playing field" that would permit anyone to take up a university place, regardless of means. It was hoped that this would not only open up more sources of funding, but encourage highly motivated, but less conventionally qualified people to apply. To an extent, that has happened, but only to an extent, which is why the Government should at least consider phasing out the loan system, and replacing it with a graduate tax.

Such a tax would lift the threat of long-term indebtedness from young people as they embark on a three- or four-year course of study. It would also relate payment to ability to pay, as the tax would be progressive, depending on a graduate's earnings. With the premium attached to a university degree in the "knowledge economy" only rising, it would be hard for graduates (or their parents, whose discontent with the loan system became clear during the election campaign) to argue that the tax was unjust. It could also allow a government a degree of socially beneficial manipulation in, say, exempting not just those who take low-paying jobs, but those who acquire skills that are in short supply or who choose to work in socially useful occupations in deprived areas.

A graduate tax system, which has the potential to offer as much of an incentive as a penalty, would do nothing to discourage mature students, and could give a significant boost to the number of school-leavers seeking a university degree.