Study links student debt to tax evasion

Graduates with student loan debts are more likely to become tax evaders later in life - particularly if they don't feel their degree course was very good - Australian research suggests.

Australia was a key model for the tuition fees and loans introduced at English universities and its Higher Education Contributions Scheme (Hecs) is well established.

In a study of the taxpaying habits of 447 recent Australian graduates, Eliza Ahmed and Valerie Braithwaite of the Australian National University were surprised to find that a student's dissatisfaction with their university course played a key role in directly triggering tax evasion.

"When graduates did not feel that they had received quality training for their investment, this discontent was expressed through shamelessness about not paying Hecs and willingness to evade tax," they said in a study published this week.

One graduate told them: "I think that Hecs should only be repaid if the education received has been of value in gaining employment".

Another complained: "The one thing that I did find annoying was paying Hecs for one or two units where the tutors were hopeless and basically didn't teach us much at all. I realise it is more the responsibility of the universities to ensure that their tutors are competent, but it is in cases like this that people resent having to pay Hecs, that is, when they didn't learn anything new."

Loss of future tax revenue as a knock-on effect of student loans would be bad news for the chancellor. The UK government is already collecting student loan repayments via the tax system and intends to collect billions of pounds from graduates in years to come.

While there have been vocal protests about top-up fees, both ministers and opponents have assumed that collecting the money in this way will be efficient and reliable.

And in one important respect the UK government is more vulnerable than the Australian authorities to graduate tax evasion because it is faced with collecting repayments from graduates throughout the European Union who are entitled to the same loans as students in England.

The Australian researchers found graduates repaying student loans were more likely to evade taxes by being paid cash in hand, exaggerating the deductions or rebates they were entitled to, or not reporting all the money they earned.

Some of the graduates argued that the Hecs scheme was socially unjust as justification for avoiding payment. Australian families have the option of paying contributions upfront but this is not practical for poor families and one graduate pointed out that this puts them behind when they begin work. They added: "When you start working (often on a low wage) there are a number of debts you face. Adding Hecs makes it all the more difficult. I was repaying Hecs as a sales assistant because the rate was lowered to $21,000."

Another told the researchers: "The government should realise that investing in tertiary education is investing in the country's future. By raising fees, introducing up-front fees ... they are encouraging people not to study and not to help educate the country. Education should be free, after all people in the army get paid to be educated!"

These are familiar arguments in the UK too and Drs Ahmed and Braithwaite warn that the legitimacy of the tax system and the legitimacy of higher education institutions are interconnected.

"If universities are unable to provide quality tuition at affordable prices for all those who wish to pursue tertiary education, then a new generation of taxpayers will be entering the labour force with a negative attitude not only to their university experiences, but also to the government and the tax system.

"Most importantly, universities and government need to work cooperatively in working out their differences and responsibilities. Through blaming each other, and allowing perceived injustice to fester and spread, they are damaging the system that supports them both," they conclude.