Reforming student finance

The focus groups have met. Surprise, surprise: nobody much likes a graduate tax. Ministers have reportedly gone back to the drawing board to search for ways to reform student finance.

Tony Blair had a lucky escape. Grumbling about fees and loans on the doorstep during the last election was largely from middle-class parents. Once they worked out the extra sums their sons and daughters would have been lumbered with for 25 years, last June's moans would have seemed like a picnic. And the huge logistical change required might not have been as trouble-free as in 1998. It would have been tempting fate to risk it.

However, the prime minister still wants 50% of young people to experience higher education by the age of 30, by 2010. Over 40% do so now. Achieving the goal relies on two things. More students from poorer backgrounds need to do A-levels and go to university. And more adults will have to take foundation degrees.

Some 48% of the children of white-collar families go to university, compared with just 18% of those from blue-collar and unskilled families. In large part, that reflects their A-level achievements. Contrary to popular mythology, the proportions were not affected by fees and loans. But they have not improved either.

GCSE results are improving fastest among disadvantaged pupils. And the introduction of bursaries for some is a big step in the right direction. But rather than recreating grants, there should instead be a big expansion in the bursary scheme. The value of the bursary should increase significantly from £2,000 and be made available to every disadvantaged student (using the same family income thresholds as loans and fees) who reaches a particular A-level or vocational standard and gains a university place.

That has two benefits. First, it deals with the real imbalance. Poorer students' attendance at university overall broadly reflects their A-level achievement. But they are greatly under-represented in the leading universities, including Oxford and Cambridge. By linking the bursaries to achievement, the government could redress that balance much more effectively than a simple recreation of the old grant. Second, expanded bursaries should be relatively easy to organise, given that an infrastructure is already in place. It will avoid the year of chaos that might attend any other system.

But the government should be more honest about expansion, too. Most of the extra places will not be among school leavers, no matter how many bursary schemes or postcode premiums are introduced. Foundation degrees must be a roaring success if the government's 50% goal is to be met. There has been some encouraging initial take-up.

People in their twenties need to be persuaded that technician skills are vital to their own future careers (as well as the knowledge economy). Ministers need to speak much more directly to their target audience and ensure that they are aware of the childcare grants and other support now available when they embark on what will often be part-time courses. Employers will need better tax incentives, too.

How does one pay for it all? There is one radical solution which ministers might be as reluctant to introduce as the graduate tax, though it is as fair and has the advantage of not burdening graduates for a quarter of a century. Fees are only paid by half of students - only a third pay the full £1,075. The government still pays 90% of all tuition costs. A significant increase in fees would be the simplest and fairest solution. If loans were extended, the upfront cost would be no greater. Since this would not alter the restriction on top-up fees, there would still be no disincentive to students attending prestige universities.

Even if this option didn't appeal (perhaps because middle-class families failed to realise that their upfront contributions were unchanged when fees were first introduced), the loans system could be changed so that reasonable rates of interest were paid. At present, repayments only take account of inflation. Since poorer students would have upfront bursaries, they might not need such large loans. And a real rate of interest would deter those better-off students who use the subsidised loans for investment purposes.

Graduates repay their loans, at present, at a rate of 9% on every pound over £10,000. There is a strong case for raising this threshold. But the principle of income-contingent repayments is a sound one. Indeed, with the changes suggested the system would closely resemble a graduate tax without the headaches. Reforming the existing system would have the merit of simplicity as well as fairness.

And it could pay for itself, too, though the Treasury might have to accept that extra funds for university teaching and capital would have to come from the same general pot as those for schools and colleges.

Conor Ryan was special adviser to David Blunkett when he was education secretary