The Staggers

The New Statesman’s rolling politics blog

Tuition fee increase will hit middle-income graduates

Putting tuition fees up to £7,000 will leave middle-income graduates repaying up to £15,000 more than their high-earning contemporaries.

By Caroline Crampton Published 13 September 2010 17:29

There has been concern expressed that raising tuition fees will deter students from applying to university, but new research suggests that a potential cutback on subsidised interest for student loans is where the real danger lies.

A report from the Social Market Foundation (SMF) has found that the proposed rise in tuition fees will leave middle-income graduates with much larger debts than their higher-paid contemporaries, as the increased fees bill will result in the government being forced to withdraw subsidised interest rates for student loans.

If, as expected, Lord Browne's review of university fees and finances (due for publication on October 11) recommends lifting the cap on tuition fees from its current level at £3,290 to £7,000, the SMF research finds that the rise in fees will cost the government an additional £1.3bn a year under the current arrangement of subsidised interest rates on student loans.

As this is obviously unsustainable, the research predicts that interest rate subsidies and loan write-offs would have to be abolished in favour of commercial rates, which would penalise those middle-income graduates who take longer to pay back the entirety of their loan. The SMF estimates that it could leave some graduates paying back up to £15,000 more than their higher-earning counterparts, even if they originally did the same degree at the same university.

In addition to the students and graduates who look likely to suffer under tuition fee increases, this issue is shaping up to be a major political challenge for the coalition. The publication of Lord Browne's review on October 11 will be the first major test of its unity, for as my colleague Samira Shackle pointed out last week, opposing such an increase in the debt burden on students has long been a central policy for the Lib Dems. Their response to the publication of Lord Browne's review will be a key indicator of how things stand within their party, and quite how long we might expect the coalition to hold up in its current form.

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Tags: tuition fees Graduate tax universities education

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2 comments

Thu, 2010-11-11 00:11 — Jeremy Smyles (not verified)

The Libdems claim they could not deliver their pledges because they didn't win the election, BUT WE KNEW THEY WOULDN'T WIN AND SO DID THEY.
We gave the Libdems our vote for them to hold to their pledges in opposition or coalition, and they also knew that.see; calamity and dodgy by jeremy smyles

Mon, 2010-09-13 18:59 — Left Is Forward (not verified)

"The SMF estimates that it could leave some graduates paying back up to £15,000 more than their higher-earning counterparts, even if they originally did the same degree at the same university."

This is nowhere near as profound as it sounds - both groups paid EXACTLY THE SAME FEE! But by repaying over a longer period of time, naturally more interest accrues. It's simply not valid to compare the two figures and calculate the difference, because if you understand the time value of money (see http://en.wikipedia.org/wiki/Time_value_of_money) you will appreciate that "2010 pounds" and "2030 pounds" are incomparable, and you can't simply compare two loans paid off at different times and subtract to conclude that one loan was "£15,000 more" - when was the "£" measured? (Clue: you've not measured the pounds at the same time, so the difference is meaningless.) Rather than sound shocked that for the same course, two people end up handing over different numbers of pounds, let's compare the cost of the loans at the time they really ARE comparable - their present value (http://en.wikipedia.org/wiki/Present_value) at the time the loan is made. Unsurprising answer: exactly the same cost at present value!

This economically illiterate comparison is pointless - it stands to reason that higher earners will repay their student loans faster. Also just in from the department of unsurprising news: the degree was actually worth more as an investment for the higher-earner (for the obvious, circular reasoning) and, just because two people do the same degree at the same institution, doesn't mean they will be earning exactly the same in 10 years time (such is life).

There are very many good reasons to abolish tuition fees. In particular, students from a wealthy background (not necessarily the same thing as students who go on to earn the most money afterwards) are less afraid of tuition fees since their parents may well make a large contribution, and will certainly be less afraid of their financial wellbeing afterwards (worst case, there's a nice big home to move back to while waiting for the economy to sort itself out or while working for free on an internship, a luxury poorer students don't have). Students from a low-income background are known to be far more put off by fees, even if loans are available. So raising tuition fees increases education inequality - which will then further increase social inequality.

There are plenty of other arguments that militate against fees: universities as a public good (regardless of whether you as an individual take a degree at one, they serve as centres of science and culture); difficulties and expense extracting repayments (e.g. for graduates who emigrate) compared to simply taking it out of general taxation; the question of whether it's sensible or sustainable to have a generation of twenty-somethings start life in a pile of debt; the possibility of education as a universal entitlement (it's absurd that we PAY sixth-formers to take A-levels, via EMA, yet we CHARGE them when they continue on to a degree, sometimes taken at the same F.E. college!)...

So to pick out this "argument" that different earners pay off loans at different rates is just misleading and wrong-headed.