Student loans saga continues


In a bid to regain much-needed popularity with young and middle-income voters, Theresa May announced at the Tory Party conference last month that she intended to raise the student loan repayment threshold to £25,000 and freeze tuition fees at £9,250.

The announcement “delighted” Martin Lewis – creator of and vehement critic of the previous Tory government’s decision to freeze the repayment threshold at £21,000, which was originally set to rise with inflation  – adding that this showed the government had “finally, belatedly, learned from the bloody nose young people gave it at the last election“.

However, the Institute for Fiscal Studies (IFS) has pointed out that the combination of these two reforms, while representing “a significant giveaway to graduates” – who will save on average £10,000 over their lifetimes – will “increase the long-run government contribution to the cost of providing higher education by around £2 billion per year.”

For the already unpopular incumbent Tory government, the ‘cost’ of HE reform is increasingly not just financial, but also political. Questions are once again being raised as to whether the fees and loans regime in fact saves the public any money, and it is becoming increasingly difficult to sell the reforms to students who currently leave university with an average debt of £50,600.


Flattering the deficit

Speaking at a Treasury Select committee meeting on the 18 October, Andrew McGettigan pointed out that the IFS forecasts wouldn’t be the end of the story: “I would be
expecting further announcements to be made, perhaps at the Budget,” he said.

The story began in 2010, when the UK coalition government – made up of the Conservative Party and Liberal Democrats – “took a huge gamble” with a suite of higher education reforms, including a new system of £9000 ‘maximum’ fees and equivalent “income-contingent” student loans, aimed at introducing a market in the sector.

As McGettigan explained in his influential (2013) book on the reforms, The Great University Gamble, these reforms took their place within an “overarching narrative” of ‘austerity’. Austerity proposed that swingeing cuts to public spending had to be imposed “to restore economic health” after the 2008 Financial Crisis, which left the UK government with a “large and increasing public sector deficit”.

However, higher education institutions, through the new fees and loans system, were “spared austerity”, McGettigan pointed out at the Treasury committee meeting.

Figure 1 shows how the £9000 fees and loans system not only mitigated the effects of drastic cuts to government-funded Higher Education Funding Council for England (Hefce) teaching grant, but also increased the income of English higher education institutions overall compared to 2010-11, before £9000 fees were first introduced.



Funding for universities
Figure 1; Source: Paul Bolton, House of Commons briefing paper 7393 ‘Higher education funding in England’

The new system also “flattered the deficit”, McGettigan pointed out, in that tax-payer subsidy for higher education no longer came out of the government’s current account – as it did with direct public funding through the Hefce teaching grant – but is shifted 30 years into the future when the loss of the loans is finally accounted for.

Income-contingent loans – initially introduced in 1998 – are not like the “mortgage-style” pre-1998 loans or like those in the US, for example, which expect a fixed monthly repayment until they are fully repaid.

“Monthly repayments are determined by the current income of the borrower not by the total amount borrowed,” McGettigan explained in The Great University Gamble. Furthermore, graduates do not start repaying until they reach an income threshold, originally £21,000 for the £9000 post-2012 loans, now increased to £25,000.

Over the threshold, graduates pay interest at the retail price index (RPI) plus 3%, irrespective of how much they borrow.

The post-2012 loans also get written off after 30 years. “In this way, the loans have a built-in subsidy to protect future low-earners. As a result, between 20 and 30 percent of graduates are modeled [at the time of writing in 2013] to be better off than before,” McGettigan added.

In terms of the tax-payer subsidy for HE, it is this 30 year write-off period that is most significant. Projections of how much this write-off will cost are constantly being revised, and with these revisions, tweaks are applied to the terms and conditions of the loans.

For example, in 2015 the percentage of the value of student loans expected to be lost through the 30 year write off went up to 45%, edging uncomfortably close to the 48.6% figure that would signal that the new system would as a whole cost more than the previous model of direct public funding.

As a result, the government froze the repayment threshold at £21,000 taking the ‘RAB charge’ (the government accounting term for the projected cost of loans) back down to between 20-25%.

This temporarily quelled the increasing political outrage at the fees and loans system and took some of the wind out of the sails of HE reform critics that had used the RAB charge figure to argue that the reforms were unsustainable, and that the sector should return to the direct funding model.

However, the focus then shifted to the way that the government could tweak the terms and conditions of the loans, tweaks that also acted retrospective on post-2012 loans already taken out.

Consumer rights expert Martin Lewis pointed out at the time that this would not be acceptable with any kind of private loan and that: “This is about how young people can trust politics, when people can retroactively change a contract, if they are lied to in contract? It is an absolute disgrace.”


Market failure

Predictably, then, with the proposed £25,000 threshold rise, the debate has shifted back to the question of sustainability.

According to the IFS: “Increasing the repayment threshold to £25,000 significantly increases the expected long-run taxpayer cost – by £2.3bn for this cohort, from £5.6bn to £7.9bn.”

The £25,000 threshold also puts the RAB charge back up to 45%, once again dangerously close to the 48.6% figure referred to above (Figure 2).

Figure 2: Impact of Theresa May’s proposed student finance reforms on government finances for the 2017 cohort (2017 prices); Source: IFS

At the Treasury committee meeting, McGettigan pointed to other flaws in the market model of HE. The fact that students didn’t pay the headline £9000 fee up front as a result of the income-contingent loan system meant that the price mechanism – so important for the functioning of a ‘real market’ – could not function.

“Because we have an income contingent repayment loan scheme, the tuition fee is not a price,” he pointed out. “It is not that it is not price sensitive. It is not a price.”

McGettigan argued that as the monthly repayments are the same for different graduates no matter how much they earn, the decision of whether or not to go to a particular university based on price – assuming that universities did start charging different fees – is a moot point.

“In terms of what repayments you are likely to make as a graduate, you may see no difference, particularly now that the repayment threshold is over £25,000,” he added. “If you are meant to be a cost-sensitive, informed consumer, there is no difference.”

HE expert Helen Carasso, who appeared at the Treasury committee alongside McGettigan, also argued that because students pay the same irrespective of how much they borrow, it also makes no difference in terms of price whether they go to a £9000 or £6000 university. From a student point of view, it is rational to go to a university that has more funding and the £9000 price tag signals “premium” quality in the absence of any other meaningful information.

The government, hellbent on introducing a market, failed to learn from experience, McGettigan added. In 2004, when the government introduced £3000 fees,  all universities took the opportunity to charge the maximum.

In 2010, the government expected the Office for Fair Access (Offa) to regulate variable fees, limiting the number that could charge the maximum through the granting of “access agreements” and fines if conditions for such agreements were not met.

Writing in 2011, however, Channel 4 fact check found that “since Offa was set up in 2002 it hadn’t flexed its muscles once. Not one university’s fee proposal had been refused.” Despite 13 of the 16 Russell Group universities not meeting benchmarks at the time, no fines had been imposed.

McGettigan pointed out that the price mechanism also relied on the entrance of ‘alternative providers’ – teaching only for-profit colleges and universities – which would be able to charge much lower fees because they didn’t have the overheads of existing institutions.

But these ‘challenger institutions’- of which there are currently 112 in English HE receiving public money through the Student Loans Company – went for a completely different market.

“The feeling was that you could run a degree in business or law for £4,500 or £5,000, make a bit of profit, but offer something that would undercut the established provision. Therefore, there would be a downwards pressure on prices elsewhere. That did not happen at all, because by and large the most aggressively expanding of those institutions did not compete for the kind of students who were applying to universities.”

Both McGettigan and Carasso concluded that the system had become too complex, with even economists and politicians struggling to understand it. In this situation, there was little hope for students as ‘consumers’ making informed decisions.

“We are talking about  signals that are being sent out here to people who cannot unpick them,” Carasso argued. “It is not because they are financially illiterate.”

“If it is too complex to understand, it is a problem,” she added . “We need to be clear, as the people making the policies, what we are doing, how we are doing it and why we are doing it.”



As with the original discussion around the sustainability of the fees and loans system, the idea of a graduate tax has returned. As McGettigan pointed out, the income-contingent loan system is a lot like a graduate tax, with the added benefit to government that loan repayments can be collected even if graduates move overseas.

The problem with moving to a graduate tax now would be that the government would have to fund universities directly – pushing the cost of HE back on to the expenditure part of the government current account – and try and recoup the cost at a later date. This would significantly undermine the Tory project of austerity, which is already faltering.

Labour’s pledge to “abolish university tuition fees” and make HE “free here too” would have the same effect. Additionally, if they do intend to abolish the existing debt, the total cost of existing loans – over £100 billion – would go straight onto the Public Sector Net Debt (PSND).

Although the total cost wouldn’t be much more, as the savings of the fees and loans system are diminishing every year, it would be politically a risky move to create such a spike in the PSND, seeing as after the Financial Crisis the Coalition government managed to convince people  that the deficit was a purely a result of New Labour’s fiscal extravagance.

To deal with the looming student loan debt, the government plans to sell more of the loan book off to private loan companies – it has already sold all of the pre-1998 mortgage-style loans at a £12 million profit.

But McGettigan explained that the government made a profit on these loans “because they had a completely different structure”. “Those loans were not collected through PAYE. You had to be chased by the Student Loans Company. The private sector, which was largely a collaboration between a debt collector and a bank, decided they had more efficient debt collection mechanisms than the Student Loans Company, so they were prepared to offer a price that was above the Government’s valuation.”

However, post-1998 income-contingent loans are not so straightforward, and the unknowns regarding how much of the value of the loans will be repaid means that the risk of investment in these loan portfolios must be hedged against through complex financial structures, exactly like the “sub prime” mortgages that caused the Financial Crisis.

“Now we are looking at a securitisation, with various flavours on offer,” McGettigan added. “They are going to offer you a price lower than your fair value.”

Even so this is attractive to the government: “A large part of the drive for the sale is to change that PSND figure. These loans are going to increase markedly over the next few years.”

The challenge for government here would be to convince the public that it had got “value for money” on the fees and loans system, once again through complex accounting tweaks.

The saga continues, with each tweak to the increasingly complex student loan system created unintended political consequences. For activists and trade unionists, there will be many more opportunities to draw attention to the failures of marketisation.



5 thoughts on “Student loans saga continues

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s