Britain | Student loans

Fees fi fo fum

The new student loans system is proving more expensive than expected

Apr 19th 2014

POLITICAL apologies are rarely so awkward. In 2012 Nick Clegg, the Liberal Democrat leader, explained in a short film why he had broken a promise to vote against raising university tuition fees. “I shouldn’t have committed to a policy that was so expensive when there’s no money around,” he said. Mr Clegg has now lost even that excuse. It appears that the new student loans scheme could in fact cost the government more than the old one. Yet that does not mean that Mr Clegg’s U-turn was a mistake.

When the coalition government raised fees paid by students in England (Scotland and Wales have their own policies) from around £3,300 to £9,000 a year, the idea was to boost universities’ incomes while cutting the amount of taxpayer cash spent on undergraduate teaching. State-backed student loans, repayable only when graduates begin earning, were extended to cover the cost of the higher fees. This, it was thought, would stoke competition in higher education while also helping to reduce the deficit.

The system can save the government money only if students do indeed repay their loans. Under the rules, graduates repay 9% of any income they earn over £21,000. Meanwhile, debt accumulates interest at the rate of inflation plus up to 3%. If they are not fully repaid, loans are written off after 30 years. (Student debts incurred before 2012 are forgiven after 25 years—but fees, interest rates and the repayment threshold are all lower, too.)

One consequence of increasing tuition fees is that a far smaller proportion of students will repay their debt in full under the new system than under the old one. And recently, as the salaries of new graduates have stagnated, the forecasts have become even less optimistic. According to analysis by the Institute for Fiscal Studies (IFS), a think-tank, 73% of graduates will not repay their loans in full (see chart). The government now expects to recover just 55% of its costs, against an estimate of 72% in 2010.

Yet in other ways the loan system is working impressively. With the worrying exception of part-timers, few students have been deterred from applying to university. Last year the proportion of 18- and 19-year-olds entering was the highest ever. Between 2011 and 2013 the number of students who had been entitled to free school meals entering the most academically demanding universities jumped by 39%. The IFS analysis also shows that the new system is remarkably progressive—those students who go on to earn the largest salaries pay back the most.

Better, universities do appear to be getting more competitive as a result. Sir Steve Smith, vice-chancellor of Exeter University, says that since fees were increased, students have become savvier—insisting that academics actually mark their essays within a few weeks, for instance. Applications to the best-ranked universities have leapt and many—including Exeter—are expanding to increase their fee income. Less prestigious institutions, too, are fighting harder to keep their students.

Low repayment rates threaten to undo this. The next government will have either to find more money for higher education or to cut spending, says Peter Scott, of the Institute of Education, a research university. In December George Osborne, the chancellor of the exchequer, announced plans to remove a government cap that limits total student numbers. That may now be difficult. Posh universities fear the government will instead cut grants for science or research. Less posh ones worry about being squeezed by loosely regulated private providers offering cheap courses.

One solution would be to force universities to take on some of the risk that loans will not be repaid. Universities confident of their graduates’ career prospects could then charge more or expand numbers without worrying. Others would have to compete by holding fees down or reducing dropout rates. It would not be an easy policy to sell. But as Mr Clegg discovered, the right course often is not.

This article appeared in the Britain section of the print edition under the headline "Fees fi fo fum"