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Loans, university, and Britain's debt-laden teenagers

Current funding of higher education in Britain places an unfair burden on the young. It cannot be right that teenagers celebrating their A-Level triumphs this week face a debt-burdened future and poorer health in order to protect the pensions of those who enjoyed a free education. 

Barbara Gunnell
11 August 2014

On 14 August some half a million teenagers in Britain will see whether they have made the necessary A-Level grades to secure a place at their chosen university. And the following day’s media will have images of jumping-for-joy teenagers, most heading for exciting new lives and the intellectual adventure of higher education.

But the celebrators will also be embarking on the first stage of amassing huge debts. By the time they graduate they are likely to have taken up more than £50,000 in loans to fund around £27,000 tuition fees and the same again in loans for maintenance. The loans attract interest from day one.

David Willetts, the former minister for universities and science, who oversaw the introduction of the higher tuition fee regime, has argued that such a loan system is fair to children from all income groups since graduates benefit from higher lifetime earnings and will only pay back the full amount when their income is sufficiently high.

Concerns from some about young people accumulating debt so young have tended to be dismissed. What could be the problem? Graduates will earn more over a lifetime and the repayment rate is gentle, kicking in only when a graduate’s earnings hit £21,000 a year. 

But a poll from the US published last week suggests that we should indeed be concerned about student indebtedness. It found that students in the US who graduated from college between 1990 and 2014 with debts of $50,000 (about £30,000) or more were significantly less likely to be thriving in life than debt-free peers. The poll measured five indicators of well-being and found a straightforward correlation between low scores and high debt. The two areas in which high debt had the most significant negative impact were physical and financial well-being.

Intrinsic unfairness

If the results were replicated in the UK, a graduate with average student debt would suffer 60 per cent worse financial well-being and 38 per cent worse physical well-being than peers graduating debt-free.

It is possible that the UK is still a more amiable place in which to be in debt than the US, but  no parent sends their offspring to university for them to end up worse off in terms of health and wealth. And no student sets off with this in mind.

The poll is doubly disturbing since the student debt system in the UK is not even fulfilling its original purpose of reducing government debt. Willetts had also argued that transferring the burden of university funding from the state to beneficiaries (students) was the only way that universities could flourish in a time of austerity.

But the system is weekly revealed as fundamentally flawed. Last month, the all-party business, innovation and skills select committee reported that on recent estimates, 45 per cent of public money lent to students will never be repaid. It has called for an urgent review of  the sustainability of the system.  

Nips and tucks are proposed. Mooted for a while (and announced by the Chancellor in the 2013 Autumn Statement) was a plan to raise up-front money for the next round of loans by selling the existing loan book which he believed to be worth £12 billion.  It became clear that this would not be the saviour of the loan system after the government’s own advisers suggested it might raise as little as £2 billion. A solution proposed by the Institute of Economic Affairs in March, was to lower the salary threshold for repayment to £18,000 a year so that graduates start paying back sooner.

But while this would reduce the government’s debt and make the percentage of un-repaid loans look better, a graduate on such a salary might reasonably argue that the better salary that a degree was supposed to guarantee had not been delivered. And they would be right. Why then, should he or she pay a higher rate of tax than someone earning, say, twice as much?

There is a further intrinsic unfairness in trying to make loans for tuition fees do the major funding of higher education.

 The Public Accounts Committee has noted: “The Student Loans Company lacks information on what 368,000 graduates who are not repaying at the moment but are still classified as being in the ‘repayment’ category are currently doing. It has little information on British graduates who live abroad and EU graduates who have also left the UK.”

At the time of this PAC report on unpaid student debt (February this year), the value of outstanding loans was £46 billion and expected to increase to £200 billion by 2042 (in 2013 prices). Students who are working and being taxed are paying not only their own debts, they are, through general taxation or through poorer public services, also contributing to the unpaid education debts of their fellows.

This is rather like paying for your own meal in a restaurant, but then being asked to pay a proportion of the bill for everyone else, too.

Writing in Times Higher Education last month, Bahram Bekhradnia, president of the politically independent Higher Education Policy Institute, suggests that this broken state of affairs is driven by ideology rather than by fairness, or even sound economic judgement, and asks why education should not once again be directly funded by government.

“What has largely been absent from the debate is the case for the substantial funding of higher education from general taxation,” he writes. Bekhradnia argues that since the government bears the huge losses of unrepaid student debt, it already makes a far greater contribution via the public purse than it originally planned. “This is inefficient and dysfunctional, and it is only ideology that has led to such an absurdity.”

His proposal is for a far lower student contribution to tuition fees (he pitches it at 25 per cent as recommended by the 1997 Dearing Committee ) and for the rest to be funded directly from the public purse. It is a simple and honest solution, placing the major responsibility for education on us all. We don’t know for any individual whether a degree will lead to financial reward for the investor, but we do know that society as a whole benefits culturally and in terms of GDP from a well-educated population.

Bekhradnia acknowledges that the Labour party has talked of lowering fees and that this would be likely to entail higher direct government grants to universities.

“But [Labour] has not yet had the courage to announce this as official policy should the party win next year’s general election,” he writes.

The courage required is that of facing down the rabidly anti-tax press and what George Monbiot has called the powerful grabbers’ class, members of which do not want to part with their grabbings. 

The T-word

It appears to be the firmly held belief of political leaders of all parties that the T- word must not be used (except in an attack on an opposing party) and certainly not within a year of an election, which presumably is why the Shadow Chancellor got in his pitch for a return to the 50p tax rate at the beginning of the year.

But the refusal to put the case for taxation for any cause – for example, for job creation or funding a highly educated creative workforce that can keep Britain in the frame for the jobs of the future – not only insults the intelligence of the electorate, it closes off major debates about the kind of society in which we want to live. When given specific options of what they are prepared to pay tax for, voters do not leap into tax-phobic rhetoric. A recent ICM poll on how Britain should deal with the NHS £30bn funding gap revealed a convincing preference among voters for raising taxes to preserve current services (48 per cent), over charging patients, or cutting back on treatment (about 20 per cent each).

This month the Intergenerational Foundation launched the second update of its intergenerational fairness index comparing the tax burden faced by young people with that of older workers and retired people. It noted that younger people face an increasing burden of paying for  pensions and services for earlier generations, while themselves being loaded down with debts such as student loans, that other generations did not have to pay. Among its recommendations to government is reducing tuition fees and student-loan interest rates.

The justice of this is impossible to deny. Perhaps we should introduce a retrospective graduate tax. All those earning more than £21,000 who enjoyed a free university education could start paying back their tuition fees at current rates through the tax system.

It cannot be right that teenagers celebrating their A-Level triumphs this week face a debt-burdened future and poorer health in order to protect the pensions of those who enjoyed a free education.

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