30 May 2019
Tuition Freeze
The potentially positive May-era legacy.
By Frank O’Nomics
The only thing that Theresa May is likely to be remembered for is a failure to deliver Brexit. One sad consequence of this is that, based on recommendations released this week, she may have set in motion a process that has a greater impact on individual and household financial well-being than the terms of our leaving the EU. Particularly if this process produces a much fairer basis on which students pay for Further Education. The Augar report, a review of higher education, chaired by Philip Augar and commissioned by Mrs May, is reportedly due to propose a number of recommendations with a view to reducing the financial pressure on graduates and encouraging vocational and technical courses instead of university degrees. Given that 700,000 apply for university each year – which keeps the numbers in higher education institutions at 2.3mn, and adds to the graduate population of 14mn – there is a potential impact on the disposable income of a cohort of our society that could rival that constrained by the uncertain consequences of various and vague Brexit regimes. The extent to which the recommendations are taken up may be questioned, but it is important to understand the reasoning behind them, and the positive and negative consequences.
Why is the current system so unfair? The average graduate is now leaving university with debts of over £50,000. This debt increases by RPI +3% until the time it is paid off. For those whose income does not exceed £25,000 there is nothing to pay until it does – and for many it will just mean that the debt gets written off after 30 years. A study by the think tank Onward this week showed that 40% of graduates earn too little, even 5 years after graduation, to start paying off their loan. The majority who do earn enough to pay are in danger of seeing 9% of their income over the threshold going in a graduate tax to pay down their debt. However, a large proportion of this group will still see their total debt continue to rise, particularly as the most recent level of interest was set at 6.3% compared with average pay growth which has been at best 3-4% This is then a regime that may not be too bad for those on low incomes, or for those from wealthy families who decline the loan at the outset, but for those in the middle it could weigh upon their disposable incomes for the whole of their working lives.
What then is the Augar report looking to propose? It is not exactly like the recent generous gesture from billionaire Robert Smith, who is paying off all of the debt of 400 recent graduates from Morehouse College in Atlanta to, as he puts it: ”put some fuel in your bus”, but it may at least cut the cost of the fuel. First, it suggests a reduction in the maximum level of fees to £7,500 from £9,250. Universities will complain that they would have to cut courses and places, but it may also encourage a focus on the provision of courses which have greater demand from potential employers. The median salary for a creative arts graduate 10 years after graduation is £23,200. It is these areas are likely to suffer. There are justifiable concerns that a reduction of such courses will leave our society poorer in all but financial terms, but economic rigour could also leave the courses that survive better targeted to future employment. Second, a much lower rate of interest is being discussed, possibly as low 1.5%. This would at a stroke change the spiralling of debt costs to, for most, a steady reduction in the real value of their debt. This will be very important, occurring at a time when people should be focusing more on paying a mortgage and saving for their retirement. At the very least there should be a move away from a link to RPI, which is an extreme measure of inflation. Why should the outlook for loan repayments be largely dependent on variations in the oil price or the value of sterling, the two key determinants of recent inflation pressure? The third element of note is to look at shifting students away from universities towards vocational and technical courses. Skill shortages and low productivity suggest that there should be positive financial incentives to encourage the consideration of such alternatives.
Many degrees are, on the admission of the education secretary Damian Hinds, “poor value”. Clearly we do want some graduates of creative arts and design, but many of them might wish to look at other avenues to follow to develop their creativity without building up huge debts. Looking at this from an economics perspective there is a need to employ nudge theory, where positive incentives are used to gently steer people towards a learning path that works best for them and the economy. There is also a need to consider greater encouragement of part-time study. The number of part-time entrants to university has fallen 49% since 2010 – a time when this could be a much more financially viable and economically flexible alternative.
There is a danger that reports such as this are produced at a time when there is little political appetite to tackle the situation, and this could very easily be one of those times. Similarly, it is not clear that the recommendations would necessarily produce the desired impact of reducing the financial burden on the young while channelling their talents in directions that would be most efficient for our economy. However, the university system is, at present, in good financial health and may well be able to withstand a reduction in fees if the courses on offer are rationalised. Similarly, there may be additional income to be had from overseas students, although the government does not propose to change the charging of EU students until 2021 at the earliest. How big is the cost to the government? Currently 45% of post-2012 loans are expected to expire without payment, so a lower loan repayment rate could actually increase total repayment levels. The report may go a long way towards helping us to understand the real issues with the current system and provide, at the very least, the basis for a discussion on the optimal solutions. In short – it is a start. The alternative is an impoverished young middle class, or a working population that is more highly taxed to cover the shortfall from student debt repayment. We may have something for which to thank Mrs May after all.
