Covid ‘could blow £12 billion hole in English student funding’

Impact of recession on graduate repayments likely to be main factor, says IFS

November 3, 2020
Sinking boat
Source: iStock

The Covid-19 pandemic could cost the Westminster government up to £12 billion extra in higher education funding for England over the long term, an analysis has suggested.

An increased number of domestic undergraduates starting university this year coupled with lower graduate loan repayments across several cohorts will add up to increased pressures on public financing of the system, according to a report from the Institute for Fiscal Studies.

The annual report on education spending in England says the country’s income-contingent loan system means “that a large negative shock to graduate earnings can dramatically reduce lifetime repayments and hence increase the long-run cost of the system to government”.

“The Covid-19 pandemic seems set to create such a shock,” it adds. “Many graduates will struggle to find work as a result of the economic crisis, and those in work will earn less on average than previously forecast.

“In addition, short-term spending will be higher this year as a result of more young people with A levels going to university on account of better-than-usual exam grades.”

It says the additional costs caused by both factors for all past and present students “are highly uncertain, but are likely to come in somewhere between £700 million and £12 billion, with a central estimate of around £5 billion”. For this year’s cohort of students, it estimates the cost to government could rise by about a fifth, or £1.6 billion.

The report also updates an analysis by the IFS published earlier this year that suggested that about a dozen universities could go bust over the long term as a result of financial problems caused by the Covid crisis.

It says that it now looks as if international enrolments for this year “might be roughly in line with our optimistic scenario (a 25 per cent fall) for most universities, and even higher at the most selective ones.

“As a result, we now expect long-term losses relating to fewer international students to come in at less than £1 billion.”

However, its overall projection for the sector’s losses is only slightly smaller than its July analysis, at about £10 billion, owing to a deterioration in the outlook on pensions.

The report says the “news on university staff pensions has been bad, suggesting that pension costs for universities are likely to be higher than in our central scenario.

“The main driver of these losses is lower expected future returns on investments, which mean more of today’s money will be needed to finance the same pension entitlements.”

This means, it says, that a “larger share” of the overall projected losses for universities were now accounted for by pensions while falls in tuition fee income might have a smaller impact.

“Under the updated assumptions, we would still expect around a dozen institutions to end up with negative assets by 2024,” it concludes.

simon.baker@timeshighereducation.com

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