Surely some mistake on student debt?

10 Apr 14

The government has got its sums badly wrong on student loans. Fifty-somethings could still be paying off their debts, and 45 per cent of students are likely to default. What can be done?

When the coalition trebled university tuition fees to a maximum of £9,000 a year, it said it was making hard choices. Students would have to repay higher fees as graduates because the government could no longer afford to subsidise their teaching grant, the argument went.

To some extent, I bought that argument at the time because the evidence of previous fee rises had been that they didn’t deter disadvantaged students, though I argued then that universities should cover loans above £6,000 and that there should be a better balance between teaching grants and fees than the government planned. I also noted the problems in raising the repayment threshold.

But even I didn’t foresee quite how the new system would work in practice. Last month, the government admitted that 45 per cent of debts under the new system are unlikely to be repaid, close to the level where the Exchequer would find itself worse off than before the fees increase.

Now, our new research by the Institute for Fiscal Studies reveals the true impact of the new loan system on middle income graduates like teachers, as they continue paying off their student loans into their fifties. It highlights the ripple effect of the changes to the loan system and some unintended consequences.

Under the old system, a typical teacher would have paid off their loans before their 40th birthday. Under the new system, they will still be making payments of over £2,000 a year throughout their forties and into their early fifties - the equivalent of an extra sixpence on their income tax. This is at a time when most will have children at school, and family and mortgage costs are at their most pressing.

As the lowest earners will repay less and high earners will be able to pay back their debts more quickly, avoiding many of the high interest charges introduced in the new system, it is those on middle incomes who will be most affected.

With this double debt trap of longer repayments for middle earning graduates and a potential loss for taxpayers, ministers should look again at the student loan system.

Students who graduate from 2015 will not have to start repaying their student loans until they are earning £21,000 a year (more than £5,000 higher than before). Payments are at nine per cent of income above that threshold. This means that while graduates in their twenties will tend to make slightly lower repayments, three quarters of graduates will continue paying back until their early fifties. At this point, most graduates will still owe tens of thousands of pounds, which the government will have to write off.

Typical graduates now have to repay £67,000 in cash terms (£35,000 in 2014 equivalent prices), twice what they paid under the old system. Since the loans now attract real interest rates from before the student even graduates, nearly half will pay back more in real terms than they borrowed.

When the government trebled fees, the Sutton Trust argued for a better balance: lower fees with a smaller cut to the university teaching grant. However, the increased repayment threshold and a strengthened access regulator were enough to win over most coalition backbenchers.

The argument is not about whether loans and fees should exist – I have always argued in favour of both since the mid-1990s - but what proportion of university funding should be paid by graduates rather than general taxation, and how much graduates should pay. I am now convinced that argument needs to be revisited in the light of the new data on defaults and repayment levels.

When the fees were introduced, we were told few universities would levy the maximum fee, and many would charge £6,000. In reality, most courses cost the maximum, another reason for the predicted default levels.

The government already provides larger maintenance grants to lower income students. Indeed, when I worked with David Blunkett to introduce tuition fees of £1,000 a year in 1998, we means tested them then. Ministers should consider doing so again. Given that most graduates are having are having large amounts of debt written off, this could be done at relatively little cost to the Exchequer. That would allow lower fees for those in receipt of full maintenance grants, who come from low income households.

There is an important social mobility point here. It is true that the new system is ‘progressive’ in the sense that those graduates whose average income is just £24,000 or less gain significantly from the new system, and those below £28,000 gain marginally in real terms. But few jobs that require a degree pay so little across a lifetime. The argument made for an investment in higher education has been about earning more than non-graduates.

So it seems unfair to penalise most those strivers who have had to work hardest to improve their lot. With means-tested fees, they would be the real gainers.
It would also provide more impetus to deal with another issue that has seen little improvement in recent years. Although more disadvantaged young people are entering higher education, numbers from low and middle income backgrounds going to our best universities have yet to see significant improvement. Students from the most advantaged fifth of neighbourhoods are still seven times more likely to go to a Russell Group university than those from the poorest fifth.

Universities today use much of the money they are required to spend on access and outreach funding bursaries and fee subsidies to attract those students. Means-tested fees would allow them to focus those resources on specific programmes to attract more of the thousands of young people who get the grades but don’t apply to the best universities.
As the experience Sutton Trust summer schools has shown, such interventions could make a real difference to those disparities in access.

The government may have got its sums wrong on student debt, but it now has an opportunity to make the right calculations to improve social mobility.

This article was first published via the Sutton Trust blog

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