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 can’t 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 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:

1. Why the current campaign on student loan interest may be misguided, misunderstood and misdirected
2. There are three ways to tackle the current student loan crisis: one is unwise, one is unaffordable and one is unpalatable. All are unfair.
3. What did the three wise men, Ron DEARING, John BROWNE & Philip AUGAR, say about student loan interest?