Hepi compares expansion plan to ‘Ponzi scheme’

The government’s plan to finance extra student places by the future sale of student loans is like a Ponzi scheme, according to a thinktank.

December 17, 2013

The Higher Education Policy Institute makes the comparison between government policy and the deliberately deceptive financial practice in a report on the costs of the new higher education funding system, published today.

And Universities UK called for “urgent answers” from the government on the funding plan behind the expansion, fearing cuts to science and research if the sums do not add up.

The Hepi report, titled The cost of the government’s reforms of the financing of higher education – an update, is written by Bahram Bekhradnia, the thinktank’s director, and John Thompson, a higher education analyst.

On the government’s plan to remove student number controls – which it estimates as creating an extra 60,000 places a year – Hepi warns that welcoming the move would be “premature until we know how the expansion will be funded, and what the consequences will be of meeting the increased costs…The consequences for the future shape and costs of higher education are potentially as significant as all that we have seen from the 2012 changes so far.”

The report suggests that the potential for unlimited expansion may see universities go beyond the government’s estimate of 60,000 extra places.

Hepi also questions the government’s plan to finance the expansion with sales first of the pre-2012 student loan book, and then post-2012 loans.

The plan “has many of the characteristics of a Ponzi scheme, relying on diminishing future income to make good increasing present deficits”, Hepi says.

“When all the pre-2012 student loans are sold, the challenge of selling the loans given to more recent entrants will be much more difficult. This is because the repayment terms for the post 2012-13 entrants are more complex, with a longer repayment period, and more of the repayments expected decades hence.”

The report concludes: “At best the current policy can only be a bridge for a few years prior to an increased budget for higher education, or to reduced student numbers, or to a cheaper package.

“The elements of such a lower-cost package have been well rehearsed: maintenance grants turned into loans, less generous loan repayment terms, cuts in the teaching grant or cuts in other parts of the HE budget.”

Paul Clark, UUK director of policy, said in response to the Hepi report that the lifting of the cap was a “positive move for the UK’s economic future”.

But he added the “move is not without risks. It is still uncertain whether the government can get good value for money on the student loan book.

“Universities have legitimate concerns about the long-term affordability of the government’s commitment and the possible effects it could have on other spending priority areas, in particular science, research and infrastructure funding. These are questions which need urgent answers.”

Hepi’s conclusions are echoed by a comment from ratings agency Moody’s on the expansion plan, also released today.

“While funding for higher grants is estimated by the government through to 2018-19, the amount of funding beyond this is uncertain. Should enrollment exceed projections, this could lead to even higher expenditures for the UK government,” Moody’s says.


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