What can defuse the student loan time bomb?

(Note: I published this piece first at The Conversation….)

According to a new pamphlet issued by the Social Market Foundation, “the Tories’ student loan system that finances our universities, voted through by the Lib Dems, is a timebomb waiting to go off”.

The author Liam Byrne, Labour’s shadow minister for universities, science and skills, rues a “free-market experiment gone wild”, but offers few insights into Labour’s preferred alternative. There is no shortage of ideas out there for him to choose from.

The reason the system isn’t working is because, on current estimates, 45p for every £1 borrowed will never be paid back.

In a recent statement, the Russell Group dropped several hints about what Britain’s leading universities think should happen next in terms of student funding. Responding to a Business Innovation and Skills Select Committee report that also warned of an “increasingly fragile” system, the Russell Group pointed out that graduates currently pay back “only” 9% of their annual earnings above £21,000. This, they noted, was a “far” higher repayment threshold than under the previous system before the new fee regime was introduced in 2012.

The statement added that the government “can, of course, change these repayment conditions in order to increase the amount of money repaid, if they so choose.” With this line, the Russell Group acknowledged that the 2012 system requires change, but stopped short of calling directly for new thresholds for student loans to pay their loans back. The decision for that would remain the government’s, as would any subsequent blame.

Who benefits from a lower threshold?

Some, such as LSE’s Nicholas Barr, have explicitly advocated a lower opening repayment threshold. £21,000 is an arbitrary figure, for which no specific rationale was ever provided. If it were cut to, say, £15,000, a graduate earning £20,000 per year would still repay only £37.50 per month (compared to nothing now). A graduate on £25,000 would pay £75 (compared to £30 now).

However, such benign calculations do not address the broader question of whether lower-earning graduates should be hit harder than their higher-earning counterparts.

The graph below is a crude initial attempt to visualise how a reduced repayment threshold would affect graduates’ total lifetime repayments.

 

The blue blocks represent how much four types of earners would currently pay back, in today’s money, in return for borrowing £9,000 in fees, plus £5,500 maintenance per year, using the defaults currently set on a popular student finance calculator.

The red blocks represent approximate total repayments under a lower £15,0000 threshold for the same four groups of earners. The groups are those with starting salaries of £20,000, £30,000, £40,000 and £50,000 respectively.

As the graph shows, a reduced threshold would hit lower earning graduates harder than higher earning graduates (excluding those whose incomes never rise above £15,000 and who therefore receive full debt forgiveness). Higher earning graduates would be slightly better off.

Punishing middle earners

Note that in neither system do the very highest earning graduates repay most. As explained by the University of Bristol’s Ron Johnston, the 2012 system is regressive because high earning graduates complete their repayments earlier and thereby accrue less interest on their debt. Cutting the threshold at which repayments begin would both benefit and enlarge this group. They’d be the winners.

The losers would be graduates who aren’t high earners. As noted in the Sutton Trust’s report, Payback Time, under the 2012 system an “average teacher” will pay back around £42,000 of student debt, and still be making repayment in their early 50s. Under the system that was withdrawn in 2012, the same teacher would have paid around £25,000 and complete at the age of 40. The danger is that tinkering with repayment thresholds makes the current system even more punishing for such graduates.

On the surface, keeping a loan-based system has its advantages. The Russell Group is right to point out that UK universities punch well above their weight relative to the proportion of GDP that comes their way, and though the 2012 system failed as an austerity measure, it has safeguarded overall funding levels for most students.

What’s more, fears that the 2012 fees hike would deter young people from lower socioeconomic backgrounds from enrolling on full-time degree programmes appear not to have materialised. This summer’s figures have shown an 8% increase among the poorest groups (though the number of mature and part-time students has fallen alarmingly).

Give graduate tax a go

An alternative approach that receives less attention is that of a graduate tax. Understandably, some commentators have expressed concern that “hypothecated” taxes (ones earmarked for a specific purpose such as a graduate tax) might be diverted elsewhere by capricious future governments. But the principle that England’s highest earning graduates should contribute the most (or, at least, as much as their middle earning counterparts) is one that would surely enjoy popular support.

Liam Byrne is right. Today’s students are, as he says: “highly anxious about taking on an average of £44,000 worth of debt in an uncertain job market where nearly half of employed recent graduates are in non-graduate jobs.”

Of course, a graduate tax would make it trickier for universities to compete on price and therefore sits uneasily within fashionable, “student-as-consumer” thinking. But the alternative is that the cost of higher education, having already been transferred from taxpayer to graduate, could be further shifted from those who benefit most to those who benefit less.

Willetts’ Legacy? Too soon to say…

This piece was originally published on LSE’s Impact of Social Science blog as “Higher Education community responds to cabinet reshuffle, but it is too soon to foretell David Willetts’ legacy” (July 15th 2014)

 

Last night, @timeshighered initiated a Twitter hashtag to gather users’ thoughts about how posterity might record the outgoing Universities minister’s contribution to the sector. It was fascinating to watch #WillettsLegacy develop, with initial ire that “Higher Education has never been so deep in the shit” (@dolbontboy) slowly giving way to “real admiration” (@mikegalsworthy) for a “thoughtful and respected” (@keith_herrmann) minister with “passion” and “enthusiasm” (@Suzanne_Wilson) for his brief.

For some, the legacy was “crippling debt” (@tmyoungman), “accelerated marketization” (@DrLeeJones) and a “black hole in funding” (@cmsdengl).  For others, Willetts was “a visionary” (@LE_Aerospace), “brilliant” and “outstanding” (@ProfRWinston). Often mentioned was “the value of having a universities minister who understands science” (@AlanHeavens).

At the time of writing, about 30% of the #WillettsLegacy tweets were positive, 45% were negative and 25% were mixed.

The success or otherwise of Willetts’ reforms won’t be known for some time yet, of course. The 2012 funding model places graduates in hitherto unknown levels of debt. Indeed, the Institute of Fiscal Studies recently noted that where under the previous student loans system 50% of graduates would complete their repayment by the age of forty, only 5% will do so under the new system. The 2012 model may be more progressive during the period immediately after graduation, but future generations of middle-earners are likely to pay more for longer.

Which? University Launch. Image credit: Which? Press Office (Flickr, CC BY SA)

 

If the reforms were an attempt to introduce competition to the sector, they were largely unsuccessful. Predictably, raising fees to £9k per year didn’t result in universities ruthlessly undercutting one another in the market place. What it did create was a plethora of “Cashpoint Colleges” teaching nothing much at all, at eye-watering expense to the taxpayer.

Indeed, early predictions of how costly the government’s underwriting of the new system would be proved wildly optimistic. RAB estimates have now risen from 30% to 45%, making the system more expensive than that which it replaced. Some call for the fee cap to be lifted; others suggest some kind of Graduate Tax may be a fairer option.

Though the widening participation agenda seems not to have taken a hit from the introduction of higher fees, UCAS report that applications from mature students and part-time students are down substantially since 2012. Even when young people from state schools get the grades for a top university, evidence shows that they’re less likely to apply and less likely to be offered a place than their equal-attainment peers from the independent sector.

Findings also indicate that some applicants are much more favoured by the applications process than others. Willetts supported the use of contextual data in admissions (“if they’ve come from a school that doesn’t get many good A-level grades,  getting a grade at that school is even more of an achievement”), but missed key opportunities to level the playing field further.

On the other hand, Willetts did much to raise the profile of teaching in Higher Education. For all of its faults, the National Student Survey shows student satisfaction rising every year. Open access for journal articles (triggered by Willetts’ own frustrations at being charged to read scholarly publications when researching his most recent book, The Pinch: How Baby-Boomers Took Their Children’s Future, and Why They Should Give it Back) is a step in the right direction.

Indeed, in Willetts, we had a minister who was willing to engage directly and openly with academic research. At a Sutton Trust event last year, I recall Willetts taking issue with an academic report authored by John Jerrim of the Institute of Education. The debate was heated, and Willetts repudiation of the evidence wasn’t entirely convincing, but it was heartening to see a policy-maker engage directly with educational research (rather than, say, dismiss its authors as blobbish ‘enemies of promise’).

With four years’ service as the Minister of State for Universities and Science, Willetts is entitled to the odd blunder. Among his most cringe-worthy was citing feminism as the “single biggest factor” for the UK’s social mobility problem, although selling off old student loan books smacked of fiscal desperation and the proposed cuts to the Disability Student Allowance are particularly offensive.

With no student having yet graduated under the 2012 system, Willetts’ legacy can be no more than a matter of speculation. Hasty measures to open up the Higher Education sector to alternative providers may yet take their toll both on universities and on the taxpayer. Those of us who received our degrees for free may wince at the levels of debt new generations of graduates face.

However, the consensus from social media, and beyond, is that Willetts shielded the Higher Educations from the worst excesses of austerity and neoliberalism. He’s generally remembered as a minister committed to his brief and ready to engage with dissenting voices; as “one of government’s genuinely nice blokes” (@tnewtondunn).

Are counter-arguments to a Graduate Tax wearing thinner with every new RAB estimate?

Last week’s news that the 2012 student fee system is likely to cost more than the one it replaced was met with silence by those who previously blamed public opposition to it on “a failure of presentation”.

For some, the solution involves lifting the cap on fees further. So when Channel 4 newscaster Cathy Newman suggested to David Willetts that another rise was on the way, his response was that it “could be“.

For others, like John Denham, the answer is to introduce shorter degrees and to cut fees by having employers part-fund students.

Somewhere between the two, advocates of a Graduate Tax point out that, if levied at the right thresholds and subject to appropriate limits, such a contribution has the potential to raise more revenue in a way that’s more progressive.

Often, the very idea of a Graduate Tax is shot down in flames, and today it was the Social Market Foundation’s Director, Emran Mian, who smeared it as “a terrible policy at a terrible time“. “If Labour does adopt a graduate tax policy,” he said, “it will be making a grave mistake.”

But are the counter-arguments to a Graduate Tax wearing thinner with every new RAB estimate?

According to Mr Mian, “everyone earning over £10,500 would have to make a contribution” and repayments would be “unlimited, both in terms of the total amount due and the period over which it is to be paid”.

Really?

Could repayments not be levied on earnings over, say, £21k, as the current system does? And could a Graduate Tax not cease 30 years after the degree is completed, as loan repayments now do?

The underlying objections of Mr Mian, who headed up the supporting civil service team for the 2010 Browne Review, seem to channel those of Nicholas Barr, who rejected a Graduate Tax on the grounds that universities should “face a system that encourages competition“.

The problem is, changes to the funding model made in the name of “austerity” begin to look ill-conceived when the tax-payer is left footing an even bigger bill.

And Mr Mian’s piece doesn’t acknowledge one of the main problems with the £9k system – that high-earning graduates end up getting their degree for substantially less than their middle-earning counterparts.

That’s not to say a Graduate Tax is without any problems of its own, of course. Hypothecated revenues would need tightly ring-fencing to stop future governments dipping their hands into the till, and the Russell Group are right to point out that “the prospect of incurring a punitive tax liability would create incentives for those who anticipate higher earnings to avoid paying“.

Some wealthier graduates may indeed drift overseas to dodge their contribution.

The SMF’s Chair, Mary Ann Sieghart, described Mr Mian’s piece as a “great demolition of the Graduate Tax“. And John Rentoul went further, arguing that the Graduate Tax has a “mythical quality of otherness shared in the old days by communism and in the new days by Swedish social democracy“.

But rather than dismiss the idea with a sweep of rhetorical flourish, wouldn’t it be better to commission some detailed economic modelling and make long-term comparisons with a £9k system that increasingly seems unfit for purpose?

Who knows? Maybe bigger loans and cheaper degrees aren’t the only two options?