Min­is­ters can’t ig­nore the higher ed­u­ca­tion debt cri­sis

The Observer - - Economics - Phillip In­man  @phillip­in­man

It should be one of the bright spots in the Bri­tish econ­omy, one that shines through the Brexit gloom, but the higher ed­u­ca­tion sec­tor has be­come a pin on which bal­ances the most enor­mous moun­tain of debt.

And with spec­u­la­tion that in­sti­tu­tions may be in fi­nan­cial trou­ble cir­cu­lat­ing around the sec­tor, min­is­ters are ner­vous.

Re­cent fig­ures show that UK uni­ver­si­ties have bor­rowed £12bn since the fi­nan­cial crash – from their banks, from pri­vate in­vestors, mostly in the US, and from the in­ter­na­tional bond mar­kets.

Cal­cu­lated by Reuters and pub­lished in the In­ter­na­tional Fi­nanc­ing

Re­view (IFR), the debt fig­ure fol­lows a string of deals by the likes of Ox­ford and Cam­bridge, Liver­pool, Bris­tol and Cardiff uni­ver­si­ties.

Ox­ford bor­rowed £750m over 100 years at an in­ter­est rate of 2.5% and is seen as a safe bet. Cardiff was not far be­hind, bor­row­ing £300m at 3% over 40 years. How­ever, the Welsh in­sti­tu­tion ran a sur­plus of just £145,000 in the year to July 2017. At this rate, when the loan ends and the cap­i­tal must be re­paid, “it would take over 2,000 years to pay off the debt”, the IFR re­ported.

This colos­sal and ris­ing to­tal of univer­sity bor­row­ing is dwarfed by pro­jec­tions for a rise in stu­dent debt from the cur­rent £100bn to £1tn over the next 25 years and the hun­dreds of mil­lions bor­rowed to build stu­dent ac­com­mo­da­tion.

Not only is there a moun­tain of debt re­liant on the suc­cess of the sec­tor: uni­ver­si­ties gen­er­ate £95bn for the econ­omy and £12.5bn of ex­ports. Towns and cities in Bri­tain with a univer­sity or two de­rive huge ben­e­fits from the eco­nomic ac­tiv­ity they gen­er­ate. Coun­cil lead­ers fall over them­selves to please their lo­cal vice-chan­cel­lors. With so much at stake, any­one would think that min­is­ters would fol­low suit.

Un­for­tu­nately, that doesn’t seem to be the case. While there are MPs and of­fi­cials in White­hall who un­der­stand how cru­cial higher ed­u­ca­tion has be­come to the fi­nances and fab­ric that un­der­pin the Bri­tish econ­omy, the cabi­net con­tin­ues to pro­cras­ti­nate about two cru­cial is­sues – re­forms of the stu­dent fees sys­tem and the treat­ment of for­eign stu­dents by the Home Of­fice.

The prime min­is­ter has set in train a re­view of post-18 tech­ni­cal ed­u­ca­tion, which is a much ne­glected sub­ject, but does lit­tle to ad­dress the dif­fi­cul­ties faced by more aca­dem­i­cally fo­cused uni­ver­si­ties.

Many of them, es­pe­cially the sec­ond tier and be­low, are left in a tricky po­si­tion. Most have al­ready cut costs by driv­ing their aca­demic and an­cil­lary staff onto pre­car­i­ous short-term and zero-hours con­tracts.

Then there is the num­ber of 18-year-olds, which is fall­ing. So is the num­ber of for­eign stu­dents.

Ox­ford and Cam­bridge will at­tract stu­dents from abroad who are pre­pared to jump through the Home Of­fice’s hoops. But the less­well-known col­leges, and even the Russell Group uni­ver­si­ties, are al­ready los­ing out.

Loans deals, many of which were signed in the eupho­ria fol­low­ing 2012 – when col­leges, sud­denly awash with stu­dent loan cash, made a dash for growth – add an­other layer of cost. Un­for­tu­nately, debts that were once deemed af­ford­able might not be in the next few years as an­nual bud­gets come un­der strain.

Last week, Sir Michael Bar­ber, the head of the univer­sity reg­u­la­tor, the Of­fice for Stu­dents (OFS), in­sisted the govern­ment would let higher ed­u­ca­tion in­sti­tu­tions in fi­nan­cial trou­ble go to the wall.

Bar­ber, a for­mer In­sti­tute of Ed­u­ca­tion pro­fes­sor, for­mer Labour govern­ment ad­viser, ex-head of McKin­sey’s global ed­u­ca­tion prac­tice and chair of the OFS, knows his stuff, but those who lend se­ri­ous amounts of money to the UK ed­u­ca­tion sec­tor seem to think other­wise.

Moody’s, the credit rat­ings agency, has built into its anal­y­sis the as­sump­tion that univer­sity loans are gilt-edged – that is to say that lend­ing to a univer­sity is as good as lend­ing to the govern­ment. This con­tra­dic­tion can be ex­plained by the ex­is­tence of a di­vide be­tween the top tier of uni­ver­si­ties, which are prob­a­bly safe with or with­out a govern­ment guar­an­tee, and the rest, which could be let go – but with con­se­quences not just for the debt hold­ers. Lo­cal com­mu­ni­ties would suf­fer and, more broadly, the na­tion would see a star in­dus­try founder.

Andrew McGet­ti­gan, au­thor of The Great Univer­sity Gam­ble, warned in 2012 that Ge­orge Os­borne and David Wil­letts, the chan­cel­lor and higher ed­u­ca­tion min­is­ter re­spec­tively, risked killing a golden goose by load­ing it up with debt.

To­day it is even clearer that min­is­ters, should they sit on their hands, will push the sys­tem fur­ther into the red and weaker in­sti­tu­tions closer to col­lapse.

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