Student-loan racket risks breaking Britain

Our university system is a scandalous mess that only works for the benefit of overpaid vice-chancellors

There are lots of different criticisms that are made of lending out money. It is unfair. The interest rates can be punitive. And it adds little value to a productive economy. “Neither a borrower nor a lender be; for a loan doth often lose both itself and friend,” as Shakespeare wisely observed in a memorable line from Hamlet.

Still, traditionally it did at least have one thing going for it. It turned a profit. And yet, the UK’S student loan system may no longer meet even that basic criteria.

According to an extraordinary report from the Institute for Fiscal Studies (IFS) this week, student loans are likely to lose money even if they are repaid in full. The university system has turned into a racket that works for no one apart from a few overpaid vice-chancellors – and it is now steadily impoverishing the country.

It takes quite some skill to lose money on something that should be as straightforward as a student loan. You give an 18-year old some cash for their degree, and when they are earning lots of money as a doctor, banker or lawyer, they pay you back with some interest on top.

Simple right? Well, not as it turns out when the Government is at the tiller. According to the IFS, the Government is not just expected to lose money on all the loans that are never repaid, but may even do so when they do get the money back.

The reason? The cost of government borrowing has in recent years been lower than the interest rates it expected to charge on student loans. As the IFS points out, however, that has now changed. The yields on gilts are now higher than expected retail price index inflation (the measure used to determine interest on new student loans). By remorseless financial logic, the British state can therefore expect to lose money on every loan.

Those who designed this toxic set-up should have seen this coming.

But the student loan system was essentially based on two assumptions, both of which have turned out to be completely wrong.

It assumed that the near-zero interest rates of the 2010s would last forever, meaning that government borrowing was essentially free, so it would be easy to make money on the loans. Any half-competent banker would have dismissed that assumption in an instant, but it seems it never occurred to the Rolls-royce minds at the Treasury that rates might go up one day.

Even worse, it assumed that all of the 1.7 million people studying for an undergraduate degree would get a sufficiently well-paid job, and that all that extra training would boost the long-term growth rate of the economy. Unfortunately that didn’t turn out to be right, either.

We have already had plenty of reports warning about the off-balance sheet costs of student financing, based on the potential default rate – although it takes many years before we know if someone will earn enough to repay their loan, or even stay in the country (given that it is extraordinarily hard to collect the debt when a student emigrates). But now the Government is expected to lose money even if the debt is repaid.

The system is a sorry mess that works for no one. It doesn’t benefit a great many students, who are not really encouraged to determine whether a degree offers value for money or not, or whether they might be better off starting their career at 18. It doesn’t work for the huge number of taxpayers who don’t go to university, but will still end up paying higher taxes to subsidise the studies of those that do.

In the short-term, perhaps it has worked for the universities, which have massively expanded, and started paying vast salaries to an incompetent administrative class that got rich off the system. But even they have now been lumbered with too many staff, too many buildings, offering courses that have no real purpose, and are entirely reliant on government subsidies to stay afloat. It is a catastrophe.

The only solution is a total redesign of the whole system, with fewer universities, of higher quality, and with not nearly so many students. But so far there is no sign that any of our political leaders are brave enough to offer a solution as radical as that. Instead, they sit back and do nothing as another calamity engulfs the public finances.