The Government’s HE Reform Package Is Unfair and Misses the Point

UK Policy Public Services

The Government’s HE Reform Package Is Unfair and Misses the Point

Commentary
Posted on: 28th February 2022
By Multiple Authors
James Scales
Skills and Future of Work Lead
Steve Coulter
Head of Industrial Strategy, Skills and Sustainability

With the government this week finally delivering its response to the three-year old Augar review of post-18 education, its vision for higher education (HE) is now clear. The good news is that the core principles of New Labour’s income-contingent student loan system, which provided the resources for universities to flourish, remain intact. The bad news is that the government has chosen to deal with rising cost pressures by making the student loan system a lot less progressive and casting doubt over further HE expansion.       

Ostensibly, the reforms are about reducing the financial drain from non-repayment of student loans, and should save about £1bn from each cohort.

Students entering HE from 2023 will encounter new rules. The point at which they will start repaying loans will drop to £25,000, interest will be set at RPI+0%, and the repayment period before any outstanding loans are written off will be extended from 30 to 40 years.

But clawing back more money from graduates by altering the system inevitably has distributional consequences. The reforms will, overwhelmingly, squeeze lower to middle-income graduates, while furnishing high-earning ones with a sizeable windfall (see graph below).

Extending the loan repayment period to 40 years will not harm higher earning graduates because they already pay off their loans before the current 30-year period expires. But they will now do so with only RPI to pay on their debt, meaning they will profit handsomely. The previous system was fairer because higher-earning graduates accrued more interest and paid off a higher total sum as a result.

Graduates who still never make more than the minimum repayment threshold will not be affected. But a lower trigger point of £25,000 means more lower-earning graduates will now pay (and more still in future as inflation erodes the real value of a £25,000 salary).

But it is lower to middling earners who will feel the greatest pinch. These graduates, including many teachers, nurses and scientists, will increasingly find that their earnings are sufficient to warrant them having to pay back their loans, but the 40-year repayment period will see them repaying their debts for a lot longer.

This surely goes against the grain of a loans system based on the progressive principle that everyone pays the same, and so it is hard to see these reforms as anything other than a regressive tax raid. One way to combine making savings with achieving a more progressive outcome would be to extend the repayment period to 40 years but maintain the current repayment threshold and keep interest rates where they are.

TBI analysis using IFS Student Finance Calculator (https://ifs.org.uk/student-finance-calculator)

Another motive on display is an assault on ‘low-value’ courses, a ruse designed largely to placate a wing of the Conservative Party that has developed something of a university phobia in recent years. By ramping up repayments for lower-earning graduates, while handing higher-earning graduates a discount, this sends a message – whether intentionally or not – that too many people go to university and it is time to pull up the drawbridge.

This helps explain why a grade floor to access student finance is also being mulled, as well as a full-blown cap on student numbers. These measures would be designed not just to nudge people away from higher education, but to actively exclude them from it. Freezing the tuition cap at £9,250 for a further two years at a time of high inflation also means a real fall in teaching resources per student that will harm quality.

This is the wrong approach to a key part of our economy and skills system at a time of stagnating productivity growth and rapid technological change that is transforming the labour market.

The government is right to want to iron out some of the rough edges in the HE system that lead to poor outcomes in places. But HE expansion has been an important driver of economic growth over the last few decades. Demand for higher-level skills of the sort imparted by a university education will only grow further still as we continue to mature as a knowledge-rich economy.

It is, of course, both prudent and fair to ensure we are striking the right balance between state, individual and society when it comes to paying for higher education. And currently, the taxpayer writes off a sizeable portion of the loans that drive much of the sector’s income. But if there is a need to recalibrate the system so that students pay more, the additional burden should be carried by the highest earners, too.

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