Unfeesable Problems


Students marched through London today demanding free higher education. I couldn’t join them, so I thought I’d do something helpful: read yesterday’s dense, 88 page report by the Higher Education Commission on funding the higher education sector—and write up a tidy digest for you.

Higher education funding is a mess. The government, desperate to keep money off the balance sheet, is writing off billions in indirect subsidies through debt write-offs; a huge burden for future generations. With its attack on high fee-paying international students—by including them in now-capped net immigration figures—it’s making it even worse.

Students are meanwhile getting charged through the nose – and then taxed to the eyeballs at 9% on everything over £21k to repay debt. And universities are losing out as the government slashes its funding. It’s a lose/lose/lose scenario for students, universities and the government.

So what did the Higher Education Commission (HEC) conclude after its investigations?

The HEC thinks that 1: “Undergraduate courses should be free at the point of use, and the sooner this is extended to taught postgraduate courses the better; 2: Universities should be expected to deliver an impressive rate of return on public investment; 3: International students (who contributed £3.53 billion to the sector last year) should be removed from net immigration numbers—on which there is a cap; 4: Privatising the student loan book is a terrible idea; 5: With this system the gov’t is building up whopping liabilities for future generations.


Currently, students will graduate with an average of £44,035 of student debt (45% of which the government will write off, the HCE estimates). The student loan book will meanwhile balloon from £46 billion in 2013 to £330 billion in 2044.

Under the current system students repay 9% of their income over £21,000 annually, for 30 years; the interest rate on the loan rises progressively with income. Any debt left after 30 years is written off by the government.

It’s a huge black hole to be dealt with by a future government.

Meanwhile, it’s planning to privatize the debt to “derisk” its balance sheet. The HEC thinks this is a shitty idea: but politicians like the idea, as it reduces headline public sector net debt (PSND):

The headline statistics—the debt and the deficit—are used to present macroeconomic competency to the public and so there is a political gain to be had from selling the loans even if it means foregoing significant income streams, committing future governments to subsidy payments and there resulting in a net long-run economic loss.

Students Protest Over The Rise In Tuition Fees
The authors think there are six funding options:

1: The status quo; 2: A graduate tax; 3: Lowering fees and increasing government grants.(gov’t pays more!); 4: Lifting/removing the fee cap (students pay more!); 5: A hybrid system; 6: “Differential fees” for courses and institutions.

Here they are, in a nutshell.

1: The status quo, with tweaks:

Reduce the earnings threshold for repayment from £21k to £15k; increase the interest rate on student loans (to reduce the burden on the government) or reduce it (to reduce pressure on students). But adds too much financial pressure to students amid already high concerns about indebtedness.

2: A graduate tax

Abolish tuition fees and boost the teaching grant to £7.34 billion per year. Introduce a 2% tax for all graduates on £10k-£25k, 2.75% tax on those on £25k-£42k and 3.5% tax on those over £42k. The government would need to borrow £4.1 billion to fund this. Graduate tax is transparent and graduates are thereby funding higher education. The transition would cost the government a lot and the repayment thresholds are too low (if raised, boosts pressure on government lending)…

3: Lowering fees, increasing government grants.

Reduce fees to £6k. Get the government to boost funding. The UK would rise in international rankings as direct funding is measured, debt write-off as a form of funding isn’t. Simple and transparent. But universities prefer fees to grants as more predictable, less prone to political vagaries, gives them more autonomy…

4: Lift the tuition fee cap.

More money for universities. Less public sector net debt. But student indebtedness grows and modelling shows debt write-offs would rise to 50%. An even bigger black hole for a future government and future generations of taxpayers…

5: Hybrid system.

Complicated system of nuanced incentives based around a lifelong learning pot of £15k allocated to everyone by the government. Universities would be able to charge over £6k per year but above that would have to pay government a levy. Positive in that it incorporates a post-graduate loan system, negative on lack of clarity; much work to be done on government spending consequences.

6: “Differential fees”

Much more starkly fixed different fees across different subject bands (much higher ones for courses with better employment potential), lots of state intervention in cherry-picking what those are and what is paid for them.

My position is that three is the best bet for its simplicity and clarity. Funding it? I’m all for ring-fenced taxes so people know exactly what a given tax is for. Pick something to tax, stick a penny on it and dedicate that to higher education.


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