Thursday, 22 January 2015

University funding challenge

I've written this feature on university funding for the Jan/Feb 2015 edition of Public Finance.

As the general election looms, Nick Clegg’s decision to back a trebling of tuition fees could come back to haunt him. A study by the Higher Education Policy Institute think-tank in Oxford suggests 10 Liberal Democrat university seats could be vulnerable to student anger, after the party’s decision to support higher fees despite its manifesto pledge to phase them out.

here are also doubts that the expected financial savings will be made. There is growing evidence that graduates will face debts into their 50s, while the Exchequer may see little real benefit because nearly half of the loans will have to be written off.

To understand why, look again at the 2012 student funding package and how it differs from what went before. When Labour introduced income-related ­tuition fees of up to £1,000 in 1999, it also replaced the remaining maintenance grants with loans to be repaid at a rate of 9% of graduate income above £10,000 a year. In 2006, fees rose to £3,000, although universities were permitted to charge less. Fees were no longer income-related, though some maintenance grants were restored. Tuition fee loans were introduced and the graduate repayment threshold was raised to £15,000.

The coalition government trebled fees to a new maximum of £9,000, extending the income contingent loans accordingly. But two crucial additional changes were made. First, the repayment threshold was increased to £21,000. Conservative ministers wanted it to be £18,000, but the LibDems insisted on the higher level. The second was the addition of a real rate of interest. Previously debt rose with the retail price index (RPI).

Under the new system, undergraduates are charged RPI+3% while studying and then pay interest of up to RPI+3% on a sliding scale once they graduate. The result is that from this year, graduates will pay off their loans – now much larger after the fees hike – much more slowly than under the old system.

Read the full article here.

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