Thursday 20 November 2014

University funding challenge

In my latest Sutton Trust blog, I look at the funding options facing higher education as debts mount for students and the government.

Hearing the BBC radio news on Tuesday, it felt a bit like a delayed echo from the spring. The headlines were all about the three quarters of students who wouldn’t pay back their loans in full, and the fact that those earning the salary of a good teacher would be paying loans off into their early fifties.

These findings, which came from April’s Sutton Trust/IFS Payback Time? report, were an important part of the evidence base for the latest inquiry from the Higher Education Commission, chaired by the impressive Ruth Thompson, former Director General of higher education in the old Department for Innovation, Universities and Skills.

In April, the IFS also joined others in highlighting how little of the extra revenue raised by the increase in fees from just over £3000 to a new £9000 maximum was likely to be recouped from the Government because so many students would not repay their loans in full. Just over 56p in every pound loaned would be paid back.

What has changed since then is that the new tougher mortgage rules introduced by the Financial Conduct Authority mean that banks are no longer allowed to ignore student loan repayments when assessing mortgage suitability. As the FCA confirmed in June, this is now regarded as ‘committed expenditure’, reducing what graduates can borrow. Our IFS report showed a typical successful teacher paying back around £2000 a year after tax through their forties.

Aside from the increased loans to cover the higher fees, there were two other significant reasons for the low levels of repayment: the increase in the repayment threshold for the new loans – £21k rather than £15k – which means slower payments after graduation; and a real rate of interest of up to inflation + 3%, which increases the total amount borrowed even more. For our report, the IFS calculated that the average student will graduate with £44,000 worth of debt, but an average of £30,000 would be written off at age 51 or 52 for the 73% of students who had not by that stage repaid their loans in full.

The cross-party commission didn’t pull its punches. “The current funding system represents the worst of both worlds,” is how the study puts it. “The government is funding higher education by writing off student debt, as opposed to directly investing in teaching grants study….Students feel like they are paying substantially more for their higher education, but are set to have a large proportion of their debt written off by the government.”

But it is easier to diagnose the problem than to find a solution. And although ministers gamely defend the new system (even if they may believe the threshold was raised higher than was prudent) others believe change is inevitable, including the Select Committee recently. In this spirit, the Commission suggests several options:
  • Cutting tuition fees to a £6,000 maximum. This would reduce student debt, but it would leave an estimated £1.72bn funding gap for universities. This is the option that Ed Miliband was reported to favour, but which is apparently not backed by his shadow chancellor because of the cost.
  • A graduate tax which would see all graduates paying back a proportion of their income rather than what they borrowed. The Commission estimates this would require government to borrow £4bn to fill the gap between ending fees and the arrival of tax revenues. They also point out that it would reduce the link between a graduate and their studies. Some argue that the present system is a form of graduate tax.
  • An option favoured by some elite universities of removing the £9,000 upper limit on fees might allow more money for universities and more competition, but higher fees would mean even higher levels of public subsidy for loans (unless the universities took the risk for those loans, as some have suggested)
  • Different charges for different universities or courses could also reduce the number graduates from expensive courses with high fees even if they were essential for the economy.
  • They also looked at reducing the threshold or interest rate, while maintaining the status quo, and at a lifelong learning pot (akin to Singapore).

There is one other option that the Commission didn’t include, but which should be considered in this debate. This would involve reducing the maximum to £6000 for all students entitled to a full maintenance grant – around four in ten students – rather than the whole student population. Doing this would still require a government to plug a funding gap, but it would be rather smaller than cutting fees for all, and would also cut the level of loan default. Freezing the threshold for repayments might also help pay for it.

The argument for this change is that, despite improvements, there is still a significant access gap ranging from 2.5 fold between those from the richest and poorest neighbourhoods for all those entering higher education to nearly ten-fold for access to the best universities. Reducing the levels of debt for less advantaged students should be a priority of any review.

Those who argue against means-tested fees say that repayments are based on graduate earnings, so it is unfair to base them on parental income. Yet from 1998 to 2006, this is what happened. More to the point, it is what currently happens with maintenance grants and loans, where the idea that all young people are financially independent at 18 is not accepted. Moreover, our polling shows 2-1 backing among the public for the idea. As we think about the changes that might help rebalance our fees and loans system ahead of next May’s election, a measure which could also improve access should be on the table too.