Tuesday, 29 May 2012

Student fees and government debt

A few days ago, I saw an interesting item on the BBC website suggesting that the move to higher tuition fees in English universities would significantly increase both public sector spending and public sector indebtedness.  The item was based on a recent report published by the Intergenerational Foundation (an organisation I had not previously heard of), written by Dr Andrew McGettigan. And the report does indeed make the claims that were highlighted by the BBC, backing them up with some careful calculation and analysis. The full report can be downloaded here, but for now, I just discuss a few key points.

(1) The government is in the process of cutting the annual HEFCE funding that pays for teaching in English universities by about £3bn. The idea was that this cash would be replaced, or more than replaced, by the higher student fees. As it has turned out, most universities are choosing to set fees at or close to the legal upper limit of £9000; assuming that enough students are recruited who are willing/able to pay such fees, universities will find that they are financially better off as a result of the government's reforms. However, because the money will now follow the students, there will be somewhat more competition between institutions to attract and retain students. This is claimed to be one of the benefits of these reforms in university financing.

(2) Most students will be able to pay the fees since they will have access to student loans from the government (via the Student Loans Company). Student funding provided in this way will not be shown as a cost for the Department for Business, Innovation and Skills (which currently has responsibility for the English universities), so this department will be shown as saving some money. But financing student loans is not free, and will be a charge on government, raising the outstanding government debt until enough graduates are paying down their loans to more than offset the new loans going to new students.

(3) This is where the story gets both messy and controversial, since the outcome of the new policies depends on a huge number of assumptions, extending a long way into the future.

(4) For students, they start to repay their loans once they graduate and achieve annual earnings over £21,000, paying back at the rate of 9% of income above the threshold, until either the loan is fully repaid, or until 30 years after graduation, when any outstanding loan is written off. If graduates have spells of low income, below the threshold, repayments are suspended. So from students' point of view, the financing of their studies should not prove too onerous.

(5) For the government, though, the picture is not so bright. If most graduates get jobs paying above the threshold and go through life as fairly high earners, then the repayment rate will be quite rapid and government will get most of its money back. But in practice outcomes will be more diverse, and the government is only expecting to get back about 70% of what is provided as student loans. It will get back a higher fraction from men than from women as women are still paid rather less than men, on average, and their labour market participation is also less due to their taking spells out of the labour market for child-bearing.

(6) The government officially expects the outstanding student loan debt to peak at about £50bn in 2030, whereas this report regards that as far too optimistic, with peak debt more likely to be about double the government's figure.

So whether the new funding model proves to be a good way of financing higher education remains to be seen. But it certainly won't be doing anything to help the UK's public finances for at least a couple of decades!

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