Changes to university fees are set to penalise lower-earning graduates

Published on 28 February 2022

Last week’s proposals on university funding are a rational response to the student loans system but 'they are also highly regressive, hitting low earners and benefiting high earners.'

Last week’s proposals on university funding are a completely understandable and rational response to the pickle we have got ourselves into with the student loans system. They strike a reasonable balance between the interests of taxpayers, students and universities. They recognise the difficult trade-offs we need to make.

They are also highly regressive, hitting low earners and benefiting high earners. They might end up cutting access to higher education. In some dimensions, they look plain delusional.

The government is trying to square too many circles. The introduction of £9,000 fees, and loans, back in 2012 was supposed to ensure that universities would be adequately funded, that they would share the costs between graduates and taxpayers and would create a market, with universities competing on both price and quality. They were supposed to avoid putting off young people, especially from poorer backgrounds, from going to university. In concentrating on achieving that last objective, they failed to achieve the first three.

There is no competition on price. Information that potential students have on quality and value is sketchy. The taxpayer is bearing a much larger share of the burden than ever envisaged. Only about a quarter of graduates will ever repay their loans in full. There is also no cap on student numbers, so the taxpayer remains very much on the hook if more young people decide to go to university and is already paying for courses that may be of limited value. The fee cap has been increased only once in a decade, meaning that the initial boost to university funding per student has dissipated. At the same time, an interest rate on loans of up to the retail prices index plus 3 per cent looks penal and unfair. And this is big money. The up-front outlay by government on loans for tuition fees and student maintenance is set to exceed £20 billion a year. As for accumulated loans, the numbers are eye-watering. The government reckons that without policy change, the student loan book would be at half a trillion pounds within 20 years.

A high earnings threshold before repayments begin, presently at £27,295, and the high interest rate make the system redistributive. The former reduces payments for lifetime low earners, the latter increases them for high earners. But the high repayment threshold is expensive for the taxpayer and the high interest rate looks unsustainable, given market interest rates.

Given all that, unless taxpayer funding was to be increased, the main elements of last week’s proposals look almost inevitable. The repayment threshold is to be reduced to £25,000 (for new students) and the interest rate cut to RPI plus 0 per cent. The repayment term will increase from 30 years to 40 years. Between them, these changes will reduce, very modestly, the cost to government. They get rid of the hated RPI plus 3 per cent interest rate.

But looked at from the point of view of progressivity, redistribution, winners and losers, the reforms look truly horrible. Low-to-middle-earning graduates could be made about £20,000 worse off over their lifetime by the changes; the highest earners could benefit by £25,000.

Cutting the interest rate could only ever help high earners. If you want to reduce the cost, then you don’t have too many options — reducing the repayment threshold and extending the term are about all that’s open. Unless you want to cut fees and hence funding for universities. And with a continued freeze on the fees, that will happen anyway.

Moving to a system where more than half of graduates will actually pay back the loan, and getting rid of some of the redistribution created by hitting high earners with the high interest rate, represents a move away from what had become effectively a 30-year graduate tax to something more like an actual loan, with a 40-year payment horizon. Although for many that 9 per cent charge on earnings will, of course, still feel like a tax, one that now will last a whole working life.

All that is defensible, in principle, if you are willing to make the case for a loan system as opposed to a graduate tax. I am still bugged, though, by the more-than-niggling suspicion that this is all driven more by arcane government accounting rules than by any real principle. While the long-run cost of student loans probably will fall by only about £1 billion a year, measured borrowing magically will fall by more like £5 billion a year in the short run, but will grow later on.

And we all need a reality check. The idea that this policy will be stable for 40 years, that what graduates in the mid-2060s will be paying back will be determined by legislation today, is little short of delusional. Yet making those assumptions makes the numbers add up.

The government paper also wrestled with the question of student numbers. The present free-for-all, with no controls over numbers, is quite new, introduced in 2015. And, given the taxpayer cost, actually rather surprising. Open-ended commitments like that make the Treasury nervous, as does the present lack of control over what courses are supported by taxpayer funds. There is, in fact, little specific being proposed here, indicating how difficult and sensitive change might be. The discussion in the paper on “prioritising provision with positive outcomes” is extremely woolly. The possible exclusion of those without grade 4 in GCSE Maths and English or without the equivalent of two grade Es at A level garnered a lot of headlines, but even with just the kinds of exemptions suggested by the government, looks like it would affect very few students. Yet where the government ends up on these issues may matter more for the future of our education system than all the reforms to student finance combined.

This article was first published in The Times and is reproduced here with kind permission.