It adds up to a dodgy deal

Malcolm Gillies questions the maths behind the new student loan policy

November 11, 2010

Our students are worried about what is "debt", what is "loan" and what is "free". These four-letter words are very deliberately being used to describe the proposed repayment obligations for our future students. I was listening closely to Lord Browne's words at a recent event at BPP University College in the City. The proposed higher education funding system "is free at the point of access"; "it is not debt; it is a contingent loan". But then, "it is through the debt write-offs that the state supports the student".

The key proposition of Browne is to relieve the public purse by withdrawing most state contribution to higher education teaching. Instead, there will be a more elaborate, state-backed loan facility for students. The student defers loan repayments until a suitable income level is secured, but then makes repayments that will include inflation and real interest charges. The government contribution for most students comes only when any residual debt needs to be written off.

Let's look at this another way. The first debtors' accounts of this new system will be wiped in the year 2045 - or whenever someone in the next three decades decides to change the conditions. So, my question about this loan, which as a taxpayer I am being asked to underwrite, is: how much of it will be prime and how much sub-prime? That is, how much will be given to people who do not have good prospects, even across three decades, of paying my loan to them back?

We should be asking: what is the solidity of this loans package currently being sold to the taxpayer, as funder/backer, and to the student, as borrower/repayer?

I remember well the advocacy for income-contingent loans to Australian higher education students some two decades ago, when the claimed "default" rate on final repayment was more than 20 per cent over a much shorter total time period. At the time, that seemed highly inefficient.

The figure for such default in Lord Browne's report is 60 per cent. That's right, the majority of all borrowers would, even after 30 years, not have repaid their full account. But he is not worried about this, saying: "For all students, studying for a degree will be a risk-free activity."

The risk is taken by someone else: presumably, the taxpayer.

The figure given by Lord Browne at his BPP talk was higher - 70 per cent of all those taking out loans would post-2045 gain some form of debt write-off. This evidently equates to being "progressive". He estimated that write-off as, on average, £1,500-£2,000 per student.

Watch out, however, because the figures are already on the move. Lord Browne's 60 per cent figure was based on the government's rate of borrowing (inflation plus 2.2 per cent). But David Willetts, the minister of state for universities and science, said in the House of Commons on 3 November that the government proposal was now to notch this up to a real (ie, commercial, 3 per cent above inflation) interest rate, at least for those ex-students with higher earnings.

We can only surmise that Willetts' default rate will be more than Lord Browne's 70 per cent. But now, on the BBC, I hear that "half" of the debts will be repaid in full.

Whatever this figure is - 50 per cent or 80 per cent, or somewhere in between - it is crucial to understand how solid and enduring these calculations are, and to address the question of whose interests are served by these far-distant write-offs. Why? Because for all non-STEM students this is the only form of government subsidy of their fees that they will ever see. And why? Because this is the very basis on which the brave new world of higher education funding is being built.

As Lord Browne said: "It is through the debt write-offs that the state supports the student."

Exactly so.

Is this efficient public policy? At these default rates, and kicked this far into the future, the answer has to be "No". Its economics are opaque. Its proponents don't seem sure of its vital statistics. And the escalating total debt and tax matrix of future graduate citizens is politely being ignored.

There is, of course, a vital role for government subsidy of higher education. We all recognise a public and a private benefit from higher education. Income-contingent loans were used early to make the repayment of the private component more equitable.

But the application of it to the full degree cost for a majority of students, then resulting in majority failure to repay even across three decades, goes too far. It simply becomes unacceptably inefficient. It is just poor policy, with a minimal chance of orderly, consistent application across the decades.

Despite high national debt, most nations recognise the need for substantial upfront government subsidy, to the student and to the institution. It has proven to be one of the best public investments. Loan repayments of the private component need to be affordable for the majority, with a clock running for a reasonable period of time. And its interest rates want to be those for government lending, not the enhanced rates of the banks.

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