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Leading article: A proposal worthy of exploration

As a general proposition, it is right that those who reap the financial benefits from a university education should make some contribution to the cost, rather than such learning being funded entirely out of general taxation. But how precisely should the beneficiaries pay?

Tuition fees have been the answer thus far. And it has been a moderately successful one. A combination of subsidised student loans (repayable only when the individual's income passes £15,000 a year) and generous grants for those from less well-off backgrounds have increased universities' funding without putting off poorer students from applying.

But there have been strains. Universities, facing a severe squeeze in their central funding, want the cap on the fees to be lifted. And there is evidence that students who do humanities degrees earn considerably less over their careers than those who study medicine or sciences. Teachers and research scientists earn less than doctors and bankers yet, under the present system, they all face the same repayment requirement.

Yesterday the Business Secretary, Vince Cable, floated a graduate tax as a possible way around some of these problems. He has instructed Lord Browne, who is examining the case for a rise in tuition fees for the Government, to examine the case for a graduate tax too. Interestingly, this chimes with the thinking of two of the candidates for the Labour leadership. Both Ed Miliband and Ed Balls, despite being part of the previous government which introduced tuition fees, have come out in favour of shifting to a graduate tax.

Is this a blind alley? Some of the objections to a graduate tax are weak, such as the idea that it would be a disincentive for students to go to university. If set at the appropriate rate, it need not be any more of a disincentive than the existing system of fees.

But there are certainly potential drawbacks. The merit of the tuition fees model is that it creates a market for university education. Prospective students are already beginning to make choices based on the perceived value to their future careers of a particular course. Over time, this should encourage universities to compete with each other to attract student applications. The effect should be to drive up standards and to hold down fees.

Replacing fees with a graduate tax system of funding risks breaking the financial transaction relationship between students and their institutions. If funding for universities is funnelled through the Treasury rather than being collected directly from students, the danger is that universities will focus their attention on lobbying the Government for their money, rather than attracting students and improving their services. There is also the drawback of replacing a relatively simple system with a more complex and less transparent one. Universities have relative certainty at the moment about their income, which helps them plan for the future and increases their autonomy. That could be jeopardised if the system is overhauled. There could also be practical problems in collecting the graduate tax from foreign students who return to their home countries after completing their studies.

Yet these objections are not overwhelming. There could still be a market effect in higher education if the proceeds of the tax were put into a specific pot for university funding and the share of individual institutions was determined by their popularity. A system of up-front fees could remain in place for overseas students. And, of course, the potential benefits to social equity are substantial, especially if the tax were to be levied on those working graduates from previous decades who benefited from free university education. Perhaps, in the end, the negatives will outweigh the positives. But Mr Cable is right that a graduate tax is, at least, worthy of exploration.