A degree of pain
A Government desperate to make savings is looking at easy pots to raid and universities are prime targets – students beware
Britain’s universities have a strong global reputation and financial pull to match. However, they are also expensive to maintain. With a record number of freshers likely to head to university this autumn, an annual bill for the Treasury that already exceeds £12bn looks set to swell. As Rishi Sunak, the Chancellor, looks to cut costs in the wake of the pandemic, higher education offers a tempting – if troublesome – target for savings.
For years, chancellors were able to pretend higher education didn’t cost a thing: money goes out, students get smart and rich, money gets paid back.
The problem was that loans were treated as a simple transaction and the implications of write-offs were left out of the national accounts.
That set fiscal watchdogs barking. The Office for Budget Responsibility labelled the arrangement a “fiscal illusion” in 2018, while the Institute for Fiscal Studies think-tank said the set-up was “absurdly generous” to the Government as it calculates near-term deficits.
The Office for National Statistics now includes the portions of loans that are not expected to be repaid as an expenditure adding, for example, £12.4bn to the 2019 deficit.
The stats body said this “can be thought of as the Government cancelling this portion of the loan at inception”.
The facts are clear: the university system in England costs the Government money, and – lacking the universal appeal of tax cuts or money for the NHS – increasingly looks like a tempting raid target as Sunak gears up for an autumn spending review.
“It’s definitely an area where they could raise more money,” says Ben Waltmann, a research economist at the IFS.
The sector’s status and funding processes have long tied it to questions of fairness: who subsides whom, and why?
Theresa May attempted to slay the dragon with a review headed by City veteran Sir Philip Augar.
He called for a wide package of measures including cutting tuition fees to £7,500 (they currently stand capped at £9,250), adjusting the repayment term on loans and reintroducing maintenance grants.
His recommendations were welcomed by May during the dying days of her premiership.
Since then, the pandemic has reshaped the world and Britain’s public finances. The Government is set to release its long-awaited response to the Augar review this autumn, but the future of funding may now be dictated by how much Sunak is willing to spend.
“The idea that the Treasury’s got spare billions lying around to make up those sorts of gaps, now pandemic has happened … just seems naive to the point of absurdity,” says Nick Hillman, director of Hepi, the higher education think-tank.
There are four main routes the Chancellor might take in an effort to cut public expenditure – all of which carry costs.
First among these is imposing new student number caps. There are a few ways this could be done in practice. Setting subject-specific limits or forcing universities to raise entry standards are two of the most obvious.
Taking that route would likely prove unpopular, especially for a Government that is preaching social mobility and talking incessantly of nebulous “levelling up” plans.
“It’s bound to be the students who are kind of relatively more marginal in terms of having the grades to get in, or possibly the willingness to take on the debt to fund it, who might be the ones who would be least likely to be able to access a place in a world in which places are constrained,” says Dr Claire Crawford, an associate professor at Birmingham.
It would also go against the demographic grain. The latest data from admissions administrator Ucas suggests starting student numbers will hit a new record this autumn. Meanwhile, the key cohort of school leavers is set to swell over the coming year as children born during Britain’s start-of-millennium baby boom become adults.
Secondly, the Government could make further cuts to teaching grants. The arts cut received some highprofile, if insipid, opposition from figures such as theatre supremo Andrew Lloyd Webber and musician Jarvis Cocker. Future efforts might meet sterner resistance.
Thirdly, the Government could simply lower tuition fees. That would be seen as a sop to students but would face a backlash from universities – many of which already say home undergraduates are subsidised by foreign and postgrad students.
Fourth, and perhaps most likely, is a shift on student loans. This would likely involve either raising interest rates, cutting the repayment threshold to trigger more and earlier payments, or lengthening the repayment period. That’s where Treasury bean counters are likely to focus their attention in the coming months.
“Any kind of way to extract more money from graduates within the current system is going to be unpopular in various ways,” says Waltmann. “And one of the reasons is that it’s going to be regressive, nearly whatever you do.”
The background music to this back-and-forth over funding is a long-running debate about what university is really worth to students.
There remains frustration over so-called “Mickey Mouse” courses, a popular target for champions of “reform”. “Golf studies” has been the dubious poster boy of such courses, but the spotlight has widened to encompass a much broader set of study areas.
The Government swung the axe last week, aiming at subsidy funding for many university arts courses.
Gavin Williamson, the Education Secretary, described the subjects affected – which include art and design, music, dance, performing arts, and media studies – as “dead-end courses that leave young people with nothing but debt”.
His words evoke an image of crushing, Us-style borrowing burdens. Graduates from America’s elite universities, particularly from Master’s schemes, are often laden with eyewatering amounts of debt.
Reporting by The Wall Street Journal found that recent graduates of Columbia University’s film programme had an average debt of $181,000 (£131,640) but were making less than $30,000 a year within two years of finishing their courses.
That has led to immense pressure from activists, and top Democrats have thrown their support behind a $1 trillion plan to wipe out debts for some 34m people.
There’s been a temptation in some quarters to assume the situation is the same in the UK. It isn’t. Even though the current system has been in place for years now, it is still misunderstood.
It follows that the Government’s approach is not motivated by wanting to stop people labouring under a mountain of debt – it’s about the bottom line.
There’s a swathe of degree topics that produce students who will never earn enough to repay their student loans. Since they are already more expensive, the logic goes, less money should be put towards them.
Many argue it’s a mercenary logic. Attending university carries a slew of “non-market” externalities that aren’t reflected in a tax return: graduates are more likely to volunteer, have longer life expectancies, better mental health, are less likely to be obese and tend to produce children who perform better in school.
The blow from the cuts isn’t devastating – equivalent to about £121.50 less per student – but there is a concern within the sector that such further cuts are on the way.
“It’s possible that it could be a signifier for things to come,” says Crawford.
At present, a student who studies for three years and receives full maintenance grants will graduate with around £50,000 in debt that will gain interest at a relatively rapid rate.
But they will only begin to repay once they earn more than £2,274 a month, at which point repayments are pinned at 9pc of earnings. After 30 years, the remaining debt is wiped.
That structure means a huge amount of loan value – just over half, by current estimates – will never be repaid. Of the cohort that began their studies last year, nearly nine in 10 will never have to fully repay the debts, with a third not paying back any at all.
As personal finance guru Martin Lewis puts it: “For many people, what they borrow is irrelevant.”
That might be cheering for prospective students but it’s an opportunity for the Treasury.
Hepi’s modelling suggests a mere five-year extension to the repayment period would save a billion per cohort. Lowering the repayment threshold to £19,390 – the level at which pre-2012 loans begin to be paid – could save £3.8bn.
There’s an argument that now, more than ever, the Government should be investing more in higher education, not less. But with Sunak seeking to tighten the national belt and burnish his fiscal conservative credentials, the temptation to pick the pockets of graduates might be too hard to resist.
‘Any kind of way to extract more money from graduates within the current system is going to be unpopular’
‘Nearly nine in 10 of the cohort that began their studies last year will never have to fully repay the debts’