This blog was written by Alan Roff, the author of a 2021 HEPI Debate Paper on student finance. Alan was Deputy Vice Chancellor of the University of Central Lancashire from 1996 to 2011 and is currently a member of the Council of the University of Salford. Alan is happy to discuss his paper and blog via email@example.com.
My 2021 HEPI debate paper, Fiscal Illusion to Graduate Contribution, sets out the financial flaws in the current Student Finance Scheme which, when introduced in 2012, sought to switch the cost of undergraduate education from state to student. The Office for Budget Responsibility (OBR) has concluded that only 38 per cent of the costs will be repaid by graduates, with the remaining 62 per cent falling onto the public purse. Eighty-three per cent of students will never repay their debts. These conclusions have resulted in revisions to the national accounts, which will increase public sector net borrowing by £128 billion by 2023/24 and a further £15 billion per year thereafter. On 24 February 2022, the Government announced changes to the scheme to reduce the cost to the Exchequer. There is a better way of achieving these savings by introducing a simple, income-related graduate contribution scheme which would end student loans and individualised debts completely.
The 24 February Announcements
The Government changes retain the current loan model but use the OBR figures as a justification for reducing the cost of higher education to the Exchequer. The main changes comprise:
- extending the period of loan repayments from 30 to 40 years*;
- further reducing the threshold income for loan repayments from £26,575pa to £25,000pa and freezing it at this level until 2028*;
- reducing the interest rate on loans; and
- freezing the annual tuition fee at £9,250 until 2025.
(*only applies to students commencing in or after 2023/24)
The extension of the loan period will make significant savings for the Exchequer from 2055 onwards, but will be reflected earlier in the National Accounts. However, the new scheme has very different effects on the four groups of potential contributors to these savings.
- High-income graduates (around one in six) are those who earn enough to pay off their full student loans within the 30 year period currently and then cease to make any further payments. Typically, these will earn over £100,000 per year (at today’s prices) for most of their careers. The changes will increase their loan repayments because of the lower income threshold, whilst interest on their loans will fall. Freezing fees will reduce their loans. They will pay off their debts earlier – still within 30 years – and pay less in total, thereby benefitting from the changes announced in February 2022.
- All other graduates (five in six) currently make loan repayments of 9 per cent of their salary over the current threshold (£26,575 pa) for the full 30-year period and will never pay off their loans. The changes will significantly increase their loan repayments (because of the reduced and then frozen income threshold) and slightly decrease their debts (because of frozen tuition fees) but most graduates will still not pay off their debts within 30 years. The overwhelming majority of graduates will therefore make higher payments not only for 30 years but also for up to 10 additional years. Around half are likely to have to make those increased payments for the full 40 year period which is being introduced. Overall, this group will pay considerably more over 40 years as a result of the Government announcements.
- Universities will find their income reduced in two ways. Firstly, the freeze on tuition fees at £9,250 per annum (which was initiated in 2017) will mean that real-terms income per student received by universities will have fallen by at least 25 per cent by 2025. Secondly, the number of students eligible for student loans will be reduced by the planned student number cuts and the restriction of eligible courses. Student numbers may be further reduced if the 40 year loan repayment period deters applications.
- Pre – £9,000 fee graduates are people who (like me!) graduated prior to the introduction of the current scheme and either carried a much smaller loan (1990 – 2012 starters) or no loans at all (pre-1990 starters). Under the current scheme – before and after the changes – this group has made no contribution whatsoever to higher education costs (pre-1990 starters) or a far smaller contribution (1990-2012 starters) than is taken from current graduates.
Under an individualised loan model, no additional costs fall on those most able to pay – highest paid graduates or those who graduated before 1990 – because they will already repay their loans or have no loans. So any savings for the Exchequer will inevitably result in extra costs for all other graduates – especially for those least able to pay. Also, universities will suffer funding cuts. To all those condemned to student debts of over £50,000 for 40 years, this looks like a scheme designed by rich graduates to serve the interests of rich graduates!
Surely our young people deserve better than this?
An Alternative Future
A simpler model would start from three conditions that state:
- there should be no up-front charge for undergraduate education;
- costs of undergraduate study should be shared between the state and the student, as it confers both individual and a societal benefits; and
- accordingly, graduates should make an income-related contribution to the costs.
The revised Government scheme satisfies these conditions, but funding undergraduate education through graduate contributions, and thereby ending the individualised debt model, would do so more equitably and transparently without raising the cost to the Exchequer. The state would no longer impose huge debts on our young people, but would require those benefitting from degree level qualifications to contribute to the cost of educating the next generation of students. It would also levy a contribution from graduates like myself, who graduated before 1990 without any debts at all and have paid no contributions since. The resultant Graduate Contribution Scheme (as set out in my paper) would, by taking more from those most able to pay, significantly reduce the payments required of most graduates and provide an ethical, progressive and inter-generationally fairer way of funding undergraduate education.
Is this not a better deal for future students?