There was an intriguing reference in the press at the weekend – in a report that Gavin Williamson wants to expand the student loan system to fund trade and higher education qualifications – that the Treasury thinks the current student loan system is “unaffordable”.
Does this mean reform is on the cards? Apparently not, I am told.
There are lots of conversations going on, including yet another consultation on reducing university tuition fees from £9,000 to £7,500 (which I personally think is a very bad idea). But that is it. Another example of how Boris Johnson’s government is unwittingly indifferent to young people and children, focusing instead on pleasing older voters.
Last week, Bristol University (my alma mater) announced it is sending debt collectors after the 1,000 or so students who have refused to pay for their accommodation, on the not unreasonable grounds that they either could not access it or, if they could, there was no point because all teaching was online.
Admittedly, students don’t help their case by either not voting or when they do get involved in political activity, resorting to the unwashed, statue toppling school of protest. But even the hardest hearted capitalist can see that they have a point. Donald Trump actually introduced a moratorium on student loan repayments during Covid.
The Student Loan system, and the university system on which it depends, are close to being bust. The size of the outstanding loan book is rising by £17bn a year, with 1.3m additional loans handed out every September. The loan book is currently worth £140 billion and the Treasury forecasts it will hit £560 billion by mid-century.
That number clearly depends on the interest rate being charged. That is calculated as inflation plus 3% – currently 5.6% – but as pretty well everybody is forecasting a rise in inflation, this will most likely jump in coming years. An excellent report by the Economic Affairs Committee of the House of Lords forecast that the outstanding book will be worth over a trillion pounds by mid-century, twice the official forecast.
With interest compounding faster than Greensill Capital’s liabilities, it is not surprising that the vast majority of loans will never be repaid. The government expects that around 25% will be paid off in full, but the current repayment rate is lower than that and that optimistic forecast is totally incredible.
It is not commonly appreciated the extent to which the Student Loan system is based on lies.
The first deception is that the system is progressive. This is untrue. Wealthier students either opt out of it, with the help of “bank of Mum and Dad”, or repay early, with help of large City salaries. Below them is a cohort of people who earn enough to be constantly required to repay while in employment, but never enough to repay the liability. This particularly effects women, who take career breaks for childcare, or those in caring professions like nursing or medicine.
For instance, the average doctor will have to pay £192,000 of loan repayments and the average male nurse, £133,000, more than twice the amount of the average female nurse (who tend to take career breaks).
The second deception is “don’t worry, you won’t have to repay it and it will be wiped out at the end of 30 years.” Anyone getting pay rises during their career risks being swept into a more penal repayment burden. And pretty well everybody, even those who never went to University, will have to foot the bill in higher taxes once the colossal liability mounting up on the public finances comes home to roost.
This leads us to the final deception, an implicit one that the system is sustainable. It plainly is not.
What is to be done? Clearly expanding the system further as Williamson proposes, without reform, will make everything an order of magnitude worse. And a reduction in university fees risks toppling large parts of the system, including landlords, into bankruptcy (if you have tears prepare to shed them now). There will be chaos, which is bound to rebound financially and politically on the government.
So here is what I propose.
First and most importantly, reduce the interest rate from the current usurious levels back to the pre-2012 level of a fixed 1.5%. This will have the instant effect of reducing the magnitude and injustice of the problem.
Second, bring the Student Loan Company under the regulatory umbrella of the Financial Services Authority and the Consumer Credit Act, thereby ensuring proper service levels. protection and honesty in the system. This would also bring to a halt the false claims, made to 17 year olds, about not having to pay the loans back.
Third, copy the American system of allowing a small proportion (it is $2,500 over there) – to be repaid tax free each year. This would allow employers to help repayments, without giving an excessive subsidy to the higher paid.
Fourth, restore tuition grants to certain critical professions, such as nursing, medicine or engineering and encourage employers to offer scholarships and other support.
The Treasury will no doubt counter that all these proposals will have up front costs. This is true, but if ever there is a case of a stitch in time will save nine, this is it.
The entire conservative economic promise has always been based not equality of outcomes, but equality of opportunity. Work hard, get educated, get trained and society will support you because, in the end, we all benefit. As it stands, the student loan system is a racket, which is turning that promise on its head. Williamson is right to want to expand the system so everyone can use it to improve themselves. But if the system isn’t reformed first, his proposals will blow up spectacularly in his face.