The Fallacy of Student Debt

The furore caused yesterday by the thoughtful and incisive comments made by Universities Minister David Willetts tells you everything you need to know about the previous government’s handling of higher education funding.

Mr Willetts didn’t even have to say ‘the other f word’ for media outlets across the board to begin the perennial scare-mongering about higher tuition fees and their alleged consequences. Willetts’ entirely reasonable assertion that the current system was unsustainable was thus immediately greeted with a potent mix of fear, anger, frustration and derision.

However, what Willetts was really getting at was the hidden flaws in Labour’s design – almost certainly resulting from political concessions – that make the way funding operates, rather than the numbers involved, insufficient to survive in the medium and long term.

These caveats actually make funding arrangements relatively generous, but on this – as with many other issues – Labour’s timidity in addressing difficult problems openly and honestly resulted in a complete failure to accurately inform the public.

One response that was particularly striking came from the President-elect of the National Union of Students, Aaron Porter. He said: "Students will graduate owing an average of £23,500 and David Willetts' suggestion that students and families have misunderstood the nature of student debt beggars belief.”

By contrast, Willetts said in his interview for the Guardian that “students should regard tuition fees as an obligation to pay higher income tax rather than as a debt”. Guess who’s right.

Why? Because in reality, student loans (by which I mean maintenance and tuition-fee loans combined) are no more a “debt” than income tax, of which the average worker pays a career bill of about £1m; yet surely no-one sees themselves as being in such arrears to the state.

Crucially, like income tax, student loan repayments are merely added to the list of deductions on an employee’s payslip; graduates don’t ‘repay’ anything – they’re never given the money in the first place.

Even if one was to consider university loan repayment as a debt, the terms are about the most favourable that one could wish for. Payments only begin at the start of the new tax year after graduation, and are only made by those earning over £15k a year, at 9% of earnings above that threshold; any balance outstanding after 25 years is written off – borne by the taxpayer.

In addition, student loans are charged interest in line with inflation, thus usually below the government’s own cost of borrowing – with the cost of the shortfall borne by… guess who. For loans taken out since 1998 – when tuition fees were introduced – no interest was charged at all in 2009-10, and the 2010-11 rate looks set to be just 1.5%*.

As for universities, they are currently being funded by the government just as substantially as before, whilst the Treasury awaits the (uncertain) repayment of the loans granted to hundreds of thousands of students. This explains Willetts’ assertion that "if fees go up, the government would have to lend people the money to pay for them… [So] the Treasury can’t afford them".

Therefore, opposition politicians, populist journalists and NUS wannabes should not rush to jump on the same old fees/debt bandwagon but instead wake up, realise the direction in which the system of higher education funding is headed, and recognise the need for radical overhaul.

And who should shoulder the burden? Consider this: a first job for somebody leaving education between 16 and 18 is, on the whole, highly unlikely to pay more than around £15k (does that figure sound familiar?); graduate-scheme employers pay starting (and often accelerating) salaries in excess of £20k without blinking. Even after taking into account loan repayments and higher tax, the degree would usually have paid for itself by the end of that scheme.

A degree certificate these days does not represent a guaranteed ticket to wealth and success. But the opportunities it presents should not be underestimated, and therefore – contrary to the view of Lib Dem deputy leader Simon Hughes – it would be wrong to expect anything other than that the individuals to whom those doors are opened should pay for the privilege.

* (The rate used is the lower of: (a) the base rate + 1%; and (b) RPI inflation, which is 4.4%)