Ilast week proposals on university funding are a completely understandable and rational response to the glitch we’ve gotten ourselves into with the student loan system. They strike a reasonable balance between the interests of taxpayers, students and universities. They recognize the difficult trade-offs we have to make.
They are also highly regressive, hitting low incomes and benefiting high incomes. They could end up cutting off access to higher education. In some dimensions, they just look delusional.
The government is trying to cut too many circles. The introduction of £9,000 fees and loans in 2012 was meant to ensure that universities would be adequately funded, that they would share costs between graduates and taxpayers and create a market, with universities competing at the both on price and quality. They were supposed to avoid dissuading young people, especially from disadvantaged backgrounds, from going to university. Focusing on achieving the latter goal, they failed to achieve the first three.
There is no price competition. The information available to potential students on quality and value is sketchy. The taxpayer bears a much larger share of the burden than ever envisaged. Only about a quarter of graduates will ever repay their loan in full. There is also no cap on the number of students, so the taxpayer remains very responsible if more young people decide to go to university and he is already paying for courses that may be of limited value. The fee cap has only been increased once in a decade, meaning that the initial increase in university funding per student has dissipated. At the same time, an interest rate on loans of up to the retail price index plus 3 percent seems penal and unfair. And that’s a lot of money. Initial government spending on student tuition and maintenance loans is expected to exceed £20bn a year. As for accumulated loans, the numbers are staggering. The government estimates that without policy change the student loan portfolio would reach half a trillion pounds within 20 years.
A high income threshold before repayments start, currently at £27,295, and the high interest rate makes the system redistributive. The first reduces payments for lifetime low earners, the second increases them for high earners. But the high repayment threshold is expensive for the taxpayer and the high interest rate seems unsustainable, given market interest rates.
Given all of this, unless taxpayer funding is increased, the main elements of last week’s proposals seem almost inevitable. The repayment threshold should be reduced to £25,000 (for new students) and the interest rate reduced to RPI plus 0%. The repayment period will increase from 30 years to 40 years. Together, these changes will reduce, very modestly, the cost to government. They get rid of the hated RPI plus 3% interest rate.
But seen from the point of view of progressivity, redistribution, winners and losers, the reforms look really horrible. Low to middle income graduates could be made worse by around £20,000 over their lifetime by the changes; highest earners could benefit from £25,000.
Reducing the interest rate could only ever help high earners. If you want to lower the cost, you don’t have too many options – lowering the repayment threshold and extending the term are pretty much all that’s open. Unless you want to reduce fees and therefore university funding. And with a continued fee freeze, it will happen anyway.
Moving to a system where more than half of graduates will actually repay the loan, and getting rid of some of the redistribution created by hitting high earners with the high interest rate, represents a move away from what had effectively become a 30-year graduate levies something more like an actual loan, with a 40-year repayment horizon. Although for many, this 9% charge on income will, of course, still feel like a tax, which will now last a lifetime.
This is all defensible, in principle, if you’re willing to argue for a loan system as opposed to a graduate tax. I’m still bothered, however, by the more than nagging suspicion that all of this is driven more by arcane government accounting rules than any real principle. While the long-term cost of student loans will probably only fall by around £1bn a year, measured borrowing will magically fall by over £5bn a year in the short term, but rise later. .
And we all need a reality check. The idea that this policy will be stable for 40 years, that what graduates pay back in the mid-2060s will be determined by today’s legislation, is a bit of an illusion. Yet making those assumptions makes the numbers add up.
The government document also tackled the issue of the number of students. The free-for-all present, with no checks on numbers, is fairly new, introduced in 2015. And, considering the cost to the taxpayer, actually rather surprising. Such open-ended appointments make the Treasury nervous, as does the current lack of control over taxpayer-funded courses. In fact, few details are offered here indicating how difficult and sensitive the change could be. The discussion in the document about “prioritizing benefits with positive outcomes” is extremely vague. The possible exclusion of those without Grade 4 Maths and English GCSE or without the equivalent of two years Es at A level has grabbed the headlines, but even with the kinds of exemptions suggested by the government, it seems that it would affect students very little. Yet the government’s decision on these issues may mean more to the future of our education system than all student funding reforms combined.
This article first appeared in The Times and is reproduced here with kind permission.