Ministers can’t ignore the higher education debt crisis
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.