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Weekend Reading: Fixing higher education funding should start with student loans

  • 25 May 2024
  • By James Purnell
  • HEPI recently published a collection of essays on the issue of funding undergraduate degrees, curated by HEPI Director of Policy and Advocacy Rose Stephenson. We are running select chapters from that collection as Weekend Reading.
  • We previously published chapters by David Willetts, Minister for Universities and Science from 2010 to 2014, Chloe Field, Vice President for Higher Education at the National Union of Students, and Jo Johnson, former Minister of State for Universities and Science (2015).
  • This chapter was written by James Purnell, President and Vice-Chancellor of the University of the Arts, London. Here he proposes an alternative to the current system of student loans.

University funding is not working. Funding for students’ courses has been falling consistently for the past decade. By 2026, it will be at its lowest level for over 25 years. At the same time, demand for going to university is increasing. This is good. We need more university graduates. But if we are to give British employers the graduates they need – and aspirant young people the world-class education they deserve – higher education funding will need reform.

It is not the task of universities to fix a broken system. Nevertheless, we must have a voice. That is why I was very pleased to take part in a HEPI discussion on the future of higher education at the Conservative Party Conference in 2023. The whole system desperately needs reform to ensure the sector’s long-term sustainability. But in the short-term, one area where I believe we can make a significant improvement is the student loan system.

In 2018, Theresa May commissioned a review into higher education, led by Sir Philip Augar. In response to Augar’s recommendations, the Government announced new reforms in 2022. For students entering higher education from 2023/24 onwards, the threshold for loan repayments was lowered from £27,295 to £25,000, frozen until 2026/27 (inclusive) and uprated with inflation rather than average earnings growth. Real interest rates were removed and the length of time before student debt is written off was increased from 30 to 40 years. This has reduced the cost per university cohort to the Exchequer by £1.12 billion, or 36 per cent of the total.

In practice, however, the reforms mean the greatest burden falls on low and middle-earning graduates. The better off, meanwhile, pay less, both in absolute terms and as a percentage of their income. The heaviest burden of all will fall on middle-earning graduates. All graduates on the fifth income decile will make higher repayments than their counterparts on the tenth income decile, with women in this decile the worst affected, paying approximately £30,000 more under the changes. Contrast this with a male graduate on the tenth income decile who will pay approximately £15,000 less. To put it bluntly, a nurse must now pay back more than a banker.

This is unfair and made worse by reforms to student maintenance. Maintenance grants were scrapped in 2016, and the maintenance loan that replaced them has not kept pace with inflation. The 2023 Student Money Survey found the average monthly shortfall between maintenance loans and student living costs is £582.

In 2022, the University of the Arts London (UAL), where I serve as Vice- Chancellor, commissioned London Economics to model some alternatives to the student loan repayment system. One alternative option is to scrap the student loan system entirely and replace it with a real graduate tax (something that has been mooted by politicians in the past). A tax tied to income, which no wealthy graduate would be able to pay their way out of, would be genuinely progressive. According to our modelling, such a policy would also allow for the return of maintenance grants.

An option that would not require such a major overhaul of the system is the introduction of a stepped repayment system. This would not cost the Exchequer a penny more. In fact, it would save £841 million a cohort. This would allow for re-investment into other parts of the system – such as maintenance support and the unit of resource available to universities. Instead of the current marginal rate of 9 per cent, graduates would pay back their loan at a rate of either 3 per cent or 6 per cent. Real interest rates would increase from 0 per cent to between 0 to 3 per cent for those earning between £27,571 and £57,570, and to 3 per cent for those earning above £57,570. Finally, the repayment period would take place over 30 years, rather than the current 40 years. The system would mean higher earners would be obliged to make repayments for more of the maximum repayment period, which would subsidise a shortfall in repayments from low and middle-earning graduates.

Either a graduate tax or a stepped repayment system could be introduced while doing more to help current students dealing with pressures from the rising cost-of-living. Reinstating maintenance grants would help rebalance the debt burden, but students also need more financial support in the here and now. Student rents increased by 14.6 per cent, on average, between 2021/22 and 2023/24, with maintenance loans struggling to keep pace.

These pressures are no doubt greater through the winter. While universities will do all they can for struggling students through advice and subsidies, there is a role for government too. Uprating maintenance loans in line with inflation is something that can and should be done immediately.

As we approach a general election, the sector must decide where to focus its lobbying efforts. Should we argue for another cross-party review, or for short-term improvements to the system? If I had to choose, I would opt for the latter. That would involve, as suggested here, reforming student finance, uprating student maintenance and reducing the loss universities make on home students and research. Augar’s review took five years from launch to (partial) implementation. The system needs reform now.

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