22 Mar 2014

Many student loans ‘may never be repaid’

New figures suggest many students will never repay the debts incurred when paying for university tuition fees.

Above: Channel 4 News presenter Cathy Newman speaks to Universities Minister David Willetts

That could leave taxpayers with a huge liability at in future decades.

But there’s also an immediate question about whether fees themselves will have to go up in the short term to provide universities with more cash.

Here’s how we got here: the coalition introduced a system to fund higher education where universities could charge a fee of up to £9,000 a year, starting in 2012.

The revenues generated by the fees would allow the government to cut the money it gave to universities each year in teaching grant.

Effectively, direct government funding was replaced by borrowed money, which helped the government cut spending as part of its austerity drive to bring down the deficit.

Repay debt with interest

Students would borrow the money to pay these fees from the Student Loans Company.

Once they got a job and their income rose above a certain level (currently set at £21,000), they would start to pay back the debt, along with interest built up on the loan.

Graduates would pay nine per cent of their income above £21,000.

Any debts not paid after 30 years would be wiped out.

It was always possible that some students would never pay back all the money borrowed to pay for the tuition fees – for example, if they were unemployed for long periods of time or they ended up with a series of low paying jobs.

So the government has been modelling how many students might fall into this category.

‘Debt will never be repaid’

The more students who end up in this situation, the more likely it is that there will be chunk of student debt that will never be paid off.

In that case, it will have to be covered by the taxpayer.

The latest estimate is that 45 per cent of student loans might never be repaid.

The student isn’t directly affected because in these circumstances they don’t have to pay the full cost of their tuition fees.

And the university isn’t affected because its received the money upfront.

But it does mean that the taxpayer faces an uncertain future liability.

Shifting costs on to students

And this is an odd consequence from a policy that was introduced partly to shift the cost of higher education from the general taxpayer (many of whom don’t go to university) onto the individual student.

The amounts involved are significant.

The Office for Budget Responsibility estimated that student loans would peak at £103bn, or 6.7 per cent of national income, at some point in the early 2030s, though they should start to fall as a share of national income after that but any shortfall will only emerge in years – possibly decades – to come.

The government argues that any modelling of how many students will pay back their debts is inevitably very imprecise and is very likely to change in the future.

But there’s a more immediate question for universities that affects their funding right now – what’s going to happen to the level of tuition fees in the next few years?

If the cap is left at £9,000, then higher education faces a slow decline in the real value of the funding they get – as inflation eats away at the fee.

It seems inevitable that at some point the fee cap will have to be raised.

Link fees to inflation

The questions then are: when should it go up and by how much? One solution would be to agree a formula to set the fee – for example, by linking it to the rate of inflation.

So in the next parliament, fees might rise by two per cent a year (assuming we manage to keep to the official inflation target).

That would mean fees going up by £180 a year, reaching £9,900 by the end of the parliament.

One attraction of this system is that it takes the decision out of the hands of politicians, who might understandably shy away from raising fees at awkward moments, such as the run-up to a general election.

And the idea was put forward by Sir Christopher Snowden – who is both vice chancellor of Surrey University and head of Universities UK.

He argued last year than the £9,000 cap is “simply not sustainable”.

But the problem with this arrangement is that it locks in the £9,000 sum as the correct amount to pay for a degree.

Arguments over real cost

Some believe that it is the wrong starting point because it doesn’t cover the cost of actually teaching the student.

Last year, the Vice Chancellor of the University of Oxford, Professor Andrew Hamilton, argued that the real cost of educating an undergraduate at his university was more like £16,000 a year .

If that’s correct, then raising the existing £9,000 fee in line with inflation would lock in permanently a significant under-funding of higher education.

Professor Hamilton pointed out that Oxford had proposed “a university should be able to vary tuition charges over time in order to bring them closer to the real cost of the education it was providing for its students…”.

He said it was “…increasingly inevitable that government – any government in future is going to have to evolve a more sophisticated and indeed variegated approach to the challenges of student funding.”

The government believes this is more of a problem for Oxbridge than for the main body of universities.

Leaving with more debt

But it remains the case that inflation is slowly eroding the real value of the fee.

And whether the £9,000 cap is moved higher, or is raised steadily in line with inflation, students will leave university with more debt, and the universities know that this will be a hard sell for any politician.

The chief executive of Universities UK, Nicola Dandridge, says there needs to be “a cross-party consensus to develop a long term and sustainable funding system” which she wants to see before the next general election.

But with any politician able to see how toxic the Liberal Democrat promise on tuition fees proved, it will be very difficult to forge that consensus.