If everyone hates today’s student loans, where are the big alternative ideas?
HEPI Director, Nick Hillman OBE, considers the paucity of big alternative ideas from those behind the campaigns against student loans.
The student loan row rumbles on for another weekend … It is an odd one because everyone is unhappy but there is no consensus on what the problem is. Is it the 9% repayment rate, as the Rethink Repayment campaign say? Is it the variable interest rate that means debts can grow even as you make repayments? Is it the latest freeze to the repayment threshold? Is it that some people have borrowed for courses that lead to modest earnings? Is that we send too many people to university? Or is it that the very idea of student debt is immoral? When you can’t agree what the problem is, it is perhaps unreasonable to expect policymakers to coalesce around a solution.
In the media interviews I have done on the issue, it sometimes feels as if I am the only person left flagging some of the advantages of the system we have. This has made me something of a lightening rod – a friend WhatsApped me this morning to say I would soon join the ‘top ten of Britain’s most hated’!
One reason we have reached this odd spot is, I think, that Ministers who complained about student loans in Opposition still seem lukewarm in their support now. But if they are not going to rip the system up for either graduates or students, then the system we have is their policy by default and it is part of their role to explain its merits. Lukewarm support for the status quo may end up resembling the apologetic stance of the Remain campaign, which of course led to defeat.
It is important to remember the student and university funding system we have exists for a reason: it reflects important trade-offs.
- As a country, we have decided to have a mass university system, which someone has to pay for.
- We have decided it makes sense to place much of the cost on the backs of those who most directly benefit (graduates in well-paid work) rather than on those who have not had the chance to study at a higher level themselves.
- We have also decided to keep a residential model of higher education, which means there are substantial living costs as well as substantial tuition costs that need to be covered.
We could make different decisions instead, such as expecting the generality of taxpayers to cover all of the current costs or sending fewer people to higher education. But let’s not pretend these routes have no challenges of their own. The latest IFS Zooms In podcast ‘Are Plan 2 student loans “unfair”’, which I was delighted to take part in, provides a summary.
I think the current conversation reveals something important: people know they don’t like the system we have but seemingly have no real idea of what a big reform to it would look like. HEPI is actually among one of the very few organisations to have published a range of big alternative ideas, from Johnny Rich’s employer contribution model, through Tim Leunig’s radical ten-point plan to Alan Roff’s graduate contribution scheme. We have floated other changes too, such as harmonising the five different student loan repayment models, having a review of the parameters of student loans once every five years or establishing a long-overdue official independent assessment of students’ true living costs.
Personally, and it is not a HEPI corporate view, I share some of the qualms people have with the current arrangements – since the Plan 2 system was designed in 2012, the repayment threshold has been mucked around with and held down when it was meant to be uprated annually, inflation has gone way above national targets (thereby increasing the interest on student loans*) and maintenance grants have been abolished (meaning the poorest students graduate with the biggest debts). All three of these changes have made the system worse in my view and some recalibration could therefore make sense. According to the Institute for Fiscal Studies, recent changes have effectively wiped out the contribution from taxpayers for the 2022 cohort, yet it was meant to be a co-payment model.
But fixing such things are tweaks; they would not rip up the system or deliver something entirely new. Bigger changes could be made if workable models could be devised to take the place of current arrangements. Remember, however, that no country in the world has a graduate tax and for good reasons. Perhaps the widespread anger among younger graduates really stems from a wider sense of intergenerational inequity. In a sense, student loans are easier to tackle than the regulations limiting housebuilding or the flatlining of productivity or the costs of childcare, yet changing them won’t solve these other challenges.
The failure of those complaining about the current system to devise a much better system may also explain why all the big national parties in power in recent years – Labour, Conservatives and Liberal Democrats – have ended up backing loan-based student finance while in office. It also explains why international bodies, such as the OECD, have tended to regard our student loan model as superior to other funding systems: they noted in 2015 (before some of the recent changes) that ‘among all available approaches, the UK offers still the most scalable and sustainable approach to university finance.’ One important consequence has been that we have been able to support more people in higher education than many competitor countries (to the chagrin of some people).
Notably, the SNP are the only UK political party that has held power over higher education policy in recent times and been properly consistent in their opposition to student fees. This approach has arguably been underwritten by the Barnett formula and Scottish students do still take on student debt (for maintenance), plus the SNP’s policies come at the cost of having to ration the number of places for Scottish students in Scottish universities. But SNP leaders still deserve some credit for this consistency, even if there are increasingly loud arguments for changing their approach too – it is that tricky old issue of trade-offs again.
* There was a recent period when inflation was significantly over 10%. The student loan interest should therefore theoretically have been much higher too. But a cap was put on it. As a result, people’s loan balances fell in real terms, which seems to have been completely forgotten about during the current debates.
My other pieces on the current student loans row can be found below:
- Why the current campaign on student loan interest may be misguided, misunderstood and misdirected
- There are three ways to tackle the current student loan crisis: one is unwise, one is unaffordable and one is unpalatable. All are unfair.
- What did the three wise men, Ron DEARING, John BROWNE & Philip AUGAR, say about student loan interest?
Comments
Ros Lucas says:
Make them all Degree Apprenticeships with a job…
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Paul Goldberg says:
I found this article to be fatalistic and unconstructive. Doing nothing to the system is not an option. If we continue like this, the graduates who have been affected will self-identify as “victims” of the UK student finance system, and I won’t blame them.
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Brian Harrison says:
“harmonising the five different student loan repayment models”
This. The overall income-contingent system is no longer coherent. Why is it that Scotland and Northern Ireland manage to maintain the same repayment scheme for all graduates whereas in England we’ve gone down the road of a mish-mash of different mini-plans? Those who use their LLE residual entitlement or train to be a teacher or doctor have to borrow under Plan 5 terms even if their undergraduate was on Plan 1 or 2. When you have loans on different terms, it doesn’t work.
Plan 1 is essentially not able to be changed anymore due to the loan sales as government would have to compensate the loan purchasers for any shortfall in expected repayments. Aligning the repayment thresholds is a positive step; plan 2 monthly repayments have already been lower than all other English plans so the frozen threshold in itself is not the issue – it’s the fact that those who started on plan 2, particularly later cohorts, feel like they expected a much higher threshold than they’ll end up with, as many will not have understood that the system can change despite the agreement saying so. This feeling is compounded by the fact that the interest accruing on plan 2 loans is higher than all other English undergraduate loans so there is a feeling of hopelessness and being shafted with a runaway balance and higher repayments making no difference to the long-run repayments.
It is clear that the optimal system has a low threshold and a low interest rate (which ironically is what the Coalition tore up). Graduates can then repay their own education costs steadily over their working lives, seeing their balance reduce, without all the opaque nonsense of cross-subsidy and mass write offs that is too complicated to fly and command public support. Conclusion: give graduates a chance to reduce their balance. This could be done by harmonising plans to plan 1 or if we have to keep the myriad of systems, introducing some flexibility for graduates to choose their repayment arrangements to reduce frustration. If they have to have a lower threshold, many would prefer to have a lower interest rate too – and so move to plan 1 or 5.
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Peter Ainsworth says:
The real issue is not the loan cost it is that a degree is increasingly of no economic value so even a small loan becomes painful. The solution is to give universities a real incentive to deliver degrees with substantial employability support which would be the case if they took responsibility for setting tuition fees and issuing the associated loans. Then there is a true alignment of interests between institution and student. Outcome regulation has been an abject failure, it is time for universities to put their money where their mouths are.
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Jonathan Alltimes says:
We need to rethink the rationale for the original government policy of expanding higher education in the 2003 White Paper ‘The future of higher education ‘. It assumed education was the best institution for alleviating povert and it assumed our productivity gap with other wealthy nations could be partly closed with higher education. The process which would enable the policy was making higher education more accessible, including with foundation degrees or other routes from school to university which did not require A-levels. After 15 years of the policy, the expansion of higher education and widening access or participation has not alleviated poverty among young adults and the productivity gaps in private sector industries have not closed and we need to understand why.
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Huy Duong says:
Dear Nick,
You wrote “We have decided it makes sense to place much of the cost on the backs of those who most directly benefit (graduates in well-paid work) rather than on those who have not had the chance to study at a higher level themselves.”, but is that really fair?
The high-earning Plan-2 graduates benefit directly from the loans they took out, but they don’t directly or indirectly benefit from the loans that the other Plan-2 graduates took out anymore than high
-earning graduates of earlier or later generations do. They don’t benefit directly or indirectly anymore than high
-earning non-graduates do.
So it seems unfair and potentially unmanageable that the system is designed such that the responsibility to pay extra falls narrowly on them.
Best wishes,
Huy
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Huy Duong says:
It also seems harsh that they have to pay NI and income tax on 100% the loan repayment. In effect, they NI and tax for helping others and for their own maintenance loans, which were below the personal allowance.
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Paul Wiltshire says:
Cut the number of students in half. Introduce minimum academic entry standards. Use some of the money saved to subsidise fees and remove punitive interest rates. Simple.
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Huy Duong says:
Even for the portion of the loan payment that pays for the payee’s own tuition fee (imagine that this is separate from the portion that helps to pay for other students’ tuition fee), it seems wrong to subject this payment to income to NI and tax. We don’t have to pay tax and NI when we pay into our pension, which is for the preparation for our old age, so why do we expect young people pay tax and NI for their preparation for their future? (This argument applies to all student loans, not just Plan 2).
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