personal finance

UK’s student funding is overdue radical reform


The realities of Britain’s student loans system have been papered over for too long. Increasing numbers have attended universities, accruing ever-greater quantities of debt while the government picks up the bill for loans that will never be repaid. The aim of bringing more students into higher education, via loans repaid on future salaries, was well intentioned. But the poor design of the system has resulted in rising costs and questionable outcomes from some graduates.

A dose of financial clarity was delivered on Monday. The Office for National Statistics announced it will put the long-term costs of student loans on to the government’s books. That means £12.3bn will be added to the annual deficit — wiping out much of the Treasury’s fiscal headroom and potentially breaching the chancellor’s “fiscal mandate” to keep borrowing under 2 per cent. The accountancy tweak might look like a dramatic policy change. But it is just an acknowledgment of reality.

The ONS’s procedure for measuring student loans followed similar international rules. But, given the large size of the UK’s book and the fact that the debt repayment is income contingent, it flattered the public spending figures by overlooking how many loans would not be repaid. Student loans are higher as a percentage of the UK’s gross domestic product than in comparable countries, such as Australia. The old measure allowed the government to ramp up student numbers without apparently increasing spending. But this was a delusion: the true cost of the loans would not be accounted for in spending terms for 30 years, while the interest was welcomed in the present.

The ONS will now separate the UK’s loan book into two: loans that will be repaid will be counted as genuine government lending, while those likely to be written off will be counted as government spending. This clarity is welcome, if overdue. Instead of spending billions without transparency, there will be greater honesty about the costs of higher education.

The change might gradually alter government policy. It reveals that the public finances are less healthy than previously admitted. It may also prove a tempting carrot for politicians who wish to reduce tuition fees, as the loans now increase the associated cost to the government. The crucial point, however, is that this accountancy change allows the country to start a far more important conversation about the priorities, structure and funding of the whole of tertiary education.

The Augar Review is examining all post-18 education. It should start from the fact that universities have survived austerity relatively well, partly because of the failure to recognise the true costs of student loans. Successive governments have also paid too little attention to other forms of tertiary education. It was no coincidence prime minister Theresa May launched the review at a further education college.

The review should also recognise the perverse incentives in the current structure, which favours the taking of university degrees by young adults above all else. There is a debate to be had about whether the least successful students — those with the poorest job opportunities — would not be better off in other forms of tertiary education.

The review should also examine the interest rates on student loans — over 6 per cent for higher earners with the largest loans — as well as the lack of caps on student numbers. The UK’s renowned university sector must be allowed to thrive, but at a sustainable level. The aim must be to fund a diverse system that provides opportunities for all, while avoiding inordinate support for the university sector alone.



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