Iain Mansfield is a former senior civil servant and winner of the Institute of Economic Affairs Brexit prize. He writes in a personal capacity.
Yesterday’s decision by the Office for National Statistics (ONS) to reclassify how student loans are treated in the government accounts added an instant £12 billion to the government’s deficit and simultaneously blew out of the water the ‘fiscal illusion’ upon which the current £9,250 tuition fee system is based. Yet though this may seem like bad news, in fact the reclassification offers a rare opportunity to move to a system of student funding that is simultaneously better for students, better for society, and better for the Conservative Party.
Though formally introduced by the Coalition, the system of £9,000 (now £9,250) tuition fees had its genesis in the Browne Review, set up in 2009 in the dying days of New Labour. The regime it ushered in has resulted in the UK having the most expensive fees in the OECD, with close to 80 per cent of students never repaying the full amount they owe.
What made £9,250 fees appear so affordable was an accounting trick described by the Chairman of the Office for Budget Responsibility as a ‘fiscal illusion’, in which the true costs were kept off balance sheet. Despite the fact that government expects to recoup only 55p in every pound lent, with 80 per cent of students expected to never repay their loan in full, the loan did not contribute to the government’s deficit – and the government was even allowed to class interest on the loan as income. In reality, the Institute for Fiscal Studies has calculated the current system costs the taxpayer more per student than the £3,000 fee system it replaced.
The ONS’s announcement eliminates this accounting trick, thereby removing the perverse incentives to favour loans over grants. In future, the portion of the loan that is not expected to be repaid will be scored against the deficit. With the Government’s Review of Post-18 Education and Funding due to report early in 2019, this clears the air for a clear sighted look at university funding, the consideration of which must be one of the new Universities Minister, Chris Skidmore’s, top priorities.
Though the immediate political impact of introducing £9,000 fees was the implosion of the Liberal Democrats, the long-term consequences for the Conservatives may be almost as devastating.
Politically, fees are highly unpopular, with almost two-thirds of people supporting their reduction or abolition – a number which goes well beyond Jeremy Corbyn’s core supporters. In addition to being opposed by the Left, tuition fees target the Conservative Party’s core supporters, by imposing a marginal tax rate of 40 per cent on graduate earners with median income into their fifties, as well as reducing their ability to save for a house deposit.
Bad for Students
It is no surprise that students have consistently opposed tuition fees. Debts of over £50,000, interest rates above six per cent and an effective marginal tax rate of 40 per cent for median earners are widely seen as unfair, even by those who accept the argument that students should make a contribution. More significant, however, is the distorting impact such high fees have had on society.
Bad for Society
By giving £9,250 to every university for each student, regardless of the course, government has introduced a major market distortion into the university system. Different courses cost different amounts to provide. Some, such as history or mathematics, may cost as little as £6,000-£7,000. Some, such as geography or creative arts, cost a little more. And some, including many of the most socially valuable courses such as medicine or engineering, cost considerably more.
Under former systems of funding, government provided the university with an amount of money intended to reflect the cost of putting on that course. Under the current system, although additional grant is provided for high cost subjects, courses that cost below £9,250 essentially receive a free taxpayer subsidy. The incentives on universities are clear: to put on the cheaper, surplus-generating courses, regardless of the demand from either the economy or from courses.
A further major problem with £9,250 fees is the impact they’ve had on part-time and mature students – an essential part of the population to reach for upskilling and retraining. The number of part time students has fallen by around a third since the new fee regime was introduced.
Defenders of £9,250 fees often claim that it is the only way of making a mass system affordable. Advocates claim that without them, we’d need to cap numbers which would reduce access, especially amongst the poorest. By exposing the true cost of loans, the ONS reclassification has removed this argument. A cap may or may not be desirable, but the arguments for and against apply equally to a system of grants or loans.
Bad for the Conservative Party
The political imperative to end £9,000 fees is not about improving the vote share amongst students. Rather, it’s about winning over people in their thirties, forties and fifties. Unlike current students, many of these people will not be intrinsically against some form of student fee – but they do see the current system as hugely unfair.
With debts of £10,000 – £15,000, a graduate in a moderately paying job could pay off their loan in their late twenties or early thirties. They would see their investment paying a return in their success in life, while the income boost from no more repayments will boost their ability to afford a mortgage.
The current system, where 80 per cent of graduates will never repay, keeps alive opposition to fees for decades. Centre-right parties win when they offer low taxes and home ownership for the majority of the population. £9,250 fees impose a 40 per cent marginal tax rate for middle income earners into their fifties, with a huge knock-on impact on their ability to save for a house. They thereby make it significantly harder to win over a group of people – aspirational, well-earning, professionals – who one might expect to be our natural supporters.
Supporters of high fees claim that they are progressive, a claim that has been cast into doubt. However, whilst the Conservative Party should champion genuinely progressive policies, they should be policies that reward hard work and enterprise, such as increasing the minimum wage or the basic rate tax threshold, not policies that are simultaneously loathed by the left and disliked by our own core supporters.
Differential fees are not the solution
Some have proposed resolving these issues with differential fees, charging more for courses that cost more, or have higher returns. Though superficially attractive, for a number of reasons this is not a good solution.
Most obviously, increasing fees for some subjects will only increase the popular opposition to the current system. More significantly, charging more for expensive yet socially valuable subjects such as medicine, engineering or chemistry would be perverse. As well as deterring students from disadvantaged backgrounds, why would we wish to charge students more to do the subjects which are most needed by our economy? This argument also exposes the fundamental flaw in the argument that high fees function as a tax: if higher education is as socially valuable as its advocates claim, why should we tax it so heavily?
Similarly, any cut in fees must be by at least 50 per cent – to £4,500 or ideally £3,000 – if it is to neutralise fees as a political issue. Notably, Ed Miliband’s 2015 proposal to cut fees to £6,000 did not cut through, as the public did not see it as a significant enough change.
A Potential Solution
In an ideal world, there would be no tuition fees, as advocated by George Osborne in 2003. In the current fiscal climate, that is unlikely to be feasible, and so instead ministers must consider options that would not cost significantly more, in real terms, than the current system. One of the most attractive options would consist of the following:
- Reduce fees to £3,000 a year.
- Supplement these fees with a teaching grant to university, with the amount paid reflecting the true cost of teaching that course.
- Reintroduce maintenance grants for poorest students.
- Loans to accrue interest at the rate of inflation.
- Repayments to start at £18,000, paying nine per cent of all earnings above that figure.
There are other important questions for the Review to consider, including whether anything should be done to stem the tide of graduates who gain little from their degrees, and how to increase funding for vocational subjects and apprenticeships. But on tuition fees, I would strongly urge Skidmore to consider reforms such as the proposals above, considering the options in the light of the ONS’ new classification.
Such a system would reduce the cost of a three-year course to £9,000, a price palatable to students and parents. The combination of lower fees, inflationary only interest and a lower repayment threshold would allow most graduates to repay the loan by their late twenties or early thirties, supporting home ownership. This change, eminently affordable, would neutralise tuition fees as an issue amongst the over thirties, would retain the principle that those who benefit make a contribution, and be an altogether fairer and better system for both students and society.