Universities in England have charged students up to £9,000 a year for undergraduate courses since a controversial 2012 higher education act was passed by the coalition government. More recently the maintenance grant, given to students from families earning less than £25,000 a year, was scrapped by former-chancellor George Osborne in his post-general election budget last year. Today undergraduate fees are set to increase again in line with inflation, under universities and science minister Jo Johnson’s new teaching excellence framework, reaching a cap of £9,250 for the 2017-18 academic year.
one issue that is rarely discussed is the fiscal sustainability of the student finance system,
The issues surrounding student finance and tuition fees are immensely controversial, and are perhaps best summarised by the reputation of former Liberal Democrat leader Nick Clegg, who went from revered to reviled within the student community over the issue. The bitterness amongst many students on campuses persists four years later; with some seeing higher education as a right similar to secondary education and arguing that higher education should be free for all. Conversely there is a sizeable portion of the student community, and of course the policymaking community, who argue the fees are fair given that graduates earn higher wages than their non-graduate counterparts.
However, one issue that is rarely discussed is the fiscal sustainability of the student finance system, given that outstanding student debt is foregone thirty years after graduation. Whilst this may sooth the minds of fiscally aware students today it presents a serious threat to the sustainability of higher education for future students.
A recent House of Commons report from January of this year expects the value of outstanding student debt to reach £100 billion by 2018 and for this accrued debt to rise to approximately £330 billion (adjusted for predicted inflation) by 2050. More concerning is that the contribution this fiscal gap is making to national debt is rising, from adding 3.5% of GDP to national debt in 2014-15, to projections of adding 8.8% of GDP to national debt by the 2040s. This is the result of less money coming into the student finance system then goes out, as the government estimates only 38% of current students will repay their loans in full.
This is deeply troubling for the future of higher education because it creates a fiscal black hole that future governments have to fill. In an optimal scenario the government is able to borrow enough money from creditors and do so at a relatively cheap rate. However this still isn’t a great scenario as that increases the national debt and passes the problem forward to future generations. Additionally the government’s creditworthiness has been getting progressively worse, as Standard & Poors recently down rated the UK’s credit rating from AA+ to AA following the Brexit vote, which means future government debt is even more expensive.
the government needs to prepare a thorough policy response to manage the growth of outstanding student debt
In a less optimal scenario the government may be unable to acquire new loans or finance its outstanding debt if we see another economic event, similar to the 2008 crash, which severely harms the financial sector. Furthermore, a future government may decide to cut the debt by significantly reducing the amount of money given to students to finance their education, which itself is problematic for the future of higher education.
To avoid any of these scenarios the government needs to prepare a thorough policy response to manage the growth of outstanding student debt, and then seek to reduce this debt over time, preferably whilst not impeding the ability of students to get an education.
Fortunately the government has already prepared a suite of policy responses to confront this issue, however they are insufficient to fully tackle the issue. In George Osborne’s Summer 2015 budget, maintenance grants were scrapped and the debt repayment threshold was to be frozen at £21,000 until at least 2021. Government estimates show this will save the government £1.4 billion by 2020-21 and increase the percentage of students fully repaying their debt from 38% to 45%.
Though this is a step in the right direction this strategy is problematic. Firstly it doesn’t offer sufficient savings to prevent the net growth of outstanding student debt owed to the government. Additionally government reports acknowledge these policies are regressive, disproportionately affecting lower income graduates and minority groups including disabled people.
An alternative could be to sell off outstanding student debt to private companies. This has been done three times in the past in 1998, 1999, and 2013, however these were mortgage-style loans that did not account for graduate income like current student loans do. The government did consider the sale of pre-2012 income-contingent loans in 2007 and 2013 however this was ruled out, with the Institute for Fiscal Studies remarking that:
“Selling the loan book will be broadly fiscally neutral in the long run, bringing in more money now at the expense of less money later on.”
This is made worse by the fact that the government receives only a fraction of the value of the debt from the sale. The last time the government sold student debt in 2013 it received just £160 million for £890 million worth of mortgage-style student debt. Consequently student debt sell offs only offer an immediate response to the financial pressures of higher education.
However, the policymaking community is proposing alternative strategies to make the system more sustainable, and LSE Professor Nicholas Barr has designed one such strategy. His paper Interest Subsidies on Student Loans: A Better Class of Drain (2010) argues that the government should not subsidise the interest rate of student loans, which are lower than the rates paid by the government on the debt used to finance the student loans.
He argues the subsidy is both expensive and regressive. Lower income graduates primarily benefit from the debt being foregone after thirty years, since any repayments they make don’t even cover the interest rate, let alone reduce their overall debt. Conversely higher income graduates disproportionately benefit from the subsidised interest rate, as it allows them to repay less money than their incomes allow. Therefore the subsidy not only costs the government money by allowing less student debt to be repaid, but it’s also regressive because the subsidy primarily helps the better off.
Barr instead proposes increasing the interest rate of student loans to increase repayments and save the government money, whilst retaining the debt cancellation timeframe to protect the bottom quintile of graduates.
A system similar to Barr’s proposal is presently the strongest candidate
This strategy could be a starting point for a thorough government response to the student finance’s unsustainability, however Barr retains the concept of having a flat interest rate. We could instead learn lessons from income tax brackets and have a series of interest rates for the repayment of student loans that apply sequentially based on graduate income. For example; a graduate pays nothing on the first £21,000 they earn, then they pay 9% of the income they earn between £21,000 and £30,000, then 12% on income they earn between £30,000 and £40,000 etc.
These numbers are of course purely hypothetical and quite arbitrary, but they illustrate a policy solution that could be both economically efficient at reducing the overall student debt, whilst being fiscally progressive by protecting lower income graduates in a similar way to income tax.
Regardless a solution to this problem needs to be found, it needs to take effect quickly to counteract the accelerating rate of student debt’s net growth, yet also be easy to transition to. A system similar to Barr’s proposal is presently the strongest candidate, as it will improve the economic efficiency of higher education funding whilst being progressive and fair to graduates of various income levels. Failing to resolve this problem however will push forward a fiscal black hole for future generations to tackle with that will threaten the sustainability of UK higher education.
Paul Bolton, Briefing Paper Number 1079: Student Loan Statistics (House of Commons, 20 January 2016). <www.parliament.uk/briefing-papers/sn01079.pdf>
Paul Johnson, Autumn Statement 2013: Introductory Remarks (IFS, 6 December 2013). <http://www.ifs.org.uk/budgets/as2013/openingremarks_AS13.pdf>
Nicholas Barr, Interest Rates on Student Loans, A Better Class of Drain (LSE, March 2013).<cee.lse.ac.uk/ceedps/ceedp114.pdf>