Student loans policy likely to cost more than the system it replaced – how could they be so wrong?

Tripling fees to £9,000 was a clever exercise in smoke and mirrors accounting. Students and universities are paying the price.

Protestors against the £9,000 tuition fees outside the University of London in 2010. Photo: Getty
Protestors against the £9,000 tuition fees outside the University of London in 2010. Photo: Getty

The latest estimate of the costs of the student loan system given by David Willetts, the Universities Minister, comes as no surprise. Both before and after the Coalition rushed through its reform of university funding in 2010, we warned in briefings to MPs that the government’s sums were wrong.

Willetts has now conceded that 45p in the pound of the money lent to students for fee and maintenance loans may never be repaid by graduates. This figure stands in sharp contrast to the Impact Assessment published by his own department of Business, Innovation and Skills. In June 2011 BIS claimed that the write-off would be between 28 and 32 per cent.

Using detailed modelling of the costs of the system undertaken by London Economics, we had no hesitation in providing evidence to the BIS Select Committee which challenged these assumptions. As it turned out the Committee’s MPs were rightly sceptical of the government’s forecasts.

It took until May 2013 for Willetts to throw in the towel and concede that the write-off might be 35p in the pound. By December 2013 an answer reported in Hansard confirmed that the BIS estimate had risen to 40p. Three months later this has increased yet again. It seems that Nick Clegg’s promise that the majority of students will never repay their loans is about to come true but it is hardly good news for taxpayers.

So is this all just an arid argument among economists? Behind all of these figures is a story which goes to the heart of the coalition’s fiscal policies and its belief that higher education should be opened to the market. Tripling fees to £9,000 was a clever exercise in smoke and mirrors accounting which removed direct funding of universities from the BIS departmental budget. Its primary aim was to help George Osborne eradicate the structural deficit by 2015. Lifting the fee cap was also accompanied by policies which favoured private providers which now benefit from double the amount of state-subsidised fee loans than were available under Labour even though they remain largely unregulated.

Unsurprisingly many younger students have opted into higher education even though fees have risen. Unless their parents enjoy considerable wealth, they have little choice but to take out a fee loan if they want to study for a degree. But 30,000 qualified students chose not to progress to university in 2012 and may never return to higher education. Critically participation by part-time and older students has melted away. This is a horrible waste of talent.

Ministers claimed that universities would be better off under their reforms – a claim that is now treated with a great deal of scepticism. By 2015 universities will have had to absorb three further years of cost-cutting with no inflation-proofing. The grant to the Higher Education Funding Council will fall by a further 9 per cent by the date of the election. The NUS is worried about maintenance grants not keeping pace with the cost of living.

Osborne’s response is to lift the cap on student numbers but not provide any additional resources. The idea is that universities will rise or fall according to how well they compete for additional students. Of course, this move will inevitably increase further the amount that taxpayers will have to write-off but there is little mention of this.

It is difficult to understand how or why the coalition got the costs of their higher education reforms so wrong for so long. The thousand dollar question which all political  parties now have to answer is just how they will fund universities in the future to deliver a system that is fair for students, graduates and taxpayers. It’s unlikely that a funding regime that costs 45p in the pound is the solution.

Pam Tatlow is Chief Executive of the university think-tank million+