Written Evidence submitted by London South Bank University (STL0020)

Treasury Committee: Student Loans Inquiry

Submission prepared by Prof David Phoenix, Vice-Chancellor, with assistance from Mike Simmons and Patrick Christie on behalf of London South Bank University (LSBU) – 1 December 2017

  1. What are the impacts of higher education funding on the public finances?

 

  1. There is a growing consensus that the current model of higher education finance is not sustainable for students or Government. The current model was introduced in 2012 as an austerity measure – attempting to maintain university funding whilst shifting the largest part of the financial burden from Government (via the HEFCE-distributed teaching grant) to students through £9,000 (now £9,250) fees. In fact, it also shifted a significant burden from today’s taxpayers to those 30 years hence, as at the heart of the new model was a shift of the burden from Government’s current balance sheet to the time of the eventual loan write-offs. With the recent increase of the repayment threshold to £25,000, the Government now estimates the Resource, Accounting and Budgeting (RAB) Charge to be 45 per cent with the cost per cohort having increased from £5.637bn to £8.491 bn.

 

  1. This means that the taxpayer is now paying more than under the pre-2012 system. At the same time England now has the most expensive tuition fees in Europe and student loan debt has risen above £100bn for the first time. The Institute for Fiscal Studies estimates that graduates will finish higher education with average debts of just over £50,800.

 

  1. The RAB is as an allocation as well as a charge. The Department for Education is given a ring-fenced allocation as part of its budget to cover the write off (RAB charge) for loans that it issues that year. Where costs are higher than estimates, this additional cost falls to the DfE.  The increase of the RAB charge caused by changes to the threshold will mean that the DfE will require additional funding from the Treasury.

 

  1. What is the economic rationale for post-2012 student loan interest rates?

 

  1. In the current wider interest rate environment, the 6.1% charged on loans to the highest earners appears to many students and others to be unfair. However, whilst the rate appears punitive, in practical terms, only the highest earners are directly affected by this rate. And reducing it would be a relatively regressive use of any further Government contribution to HE finance which might more effectively be used to reinstate maintenance grants for the poorest students.

 

  1. It is punitive however that the 6.1% is also applied during a student’s study period, meaning that students could accrue around £5,800 in interest during this time. Although the Bank of England has discussed the possibility of increasing interest rates to combat rising inflation it is possible that, in the absence of this happening, Brexit related devaluation of the pound of supply-side pressures will lead to even higher levels of inflation indexed interest rates for students and graduates.

 

  1. A higher rate of interest for higher earns was intended to make the repayment system more progressive. However, as the lowest earners are not able to pay off their loan before the write-off period of 30 years they can often pay more in real terms that those who pay off their loans, with a higher rate of interest, earlier.

 

  1. We would be supportive of the interest-linked rate being fixed to CPI – the Bank of England’s measure of inflation, rather than the higher RPI. 

 

  1. What is the rationale behind the repayment threshold?

 

  1. Yes; we support the recent announcement related to raising the repayment threshold. To compensate partially for the raising of the fee cap a number of progressive elements were added into the 2012 student loan system. Many of these elements were eroded by subsequent changes. One of these included the freezing of the repayment threshold (shortly before a period of higher inflation). Raising the repayment threshold helps rebalance this and will be of great benefit to low and middle-earners. We believe that it should, as originally intended, be uprated with average earnings.

 

  1. Would a graduate tax be preferable to the current model?

 

  1. We do not support the implementation of a graduate tax. A system funded wholly through Government expenditure would be likely to lead to the re-introduction of student number controls. This would undermine the key benefit of the funding system which was the removal of the cap on student numbers. This would harm social mobility by reducing the number of places available to Widening Participation students.  It would also likely cause the loss of access agreement funding which was the equivalent of £725.2 million in 2015-16.

 

  1. Taxes are not earmarked for particular expenditure. The number of 18 year olds has decreased since 2011. If this trend continues while the number of people qualifying for paying the graduate tax increases, the return will outstrip the required expenditure and will likely be used on other government commitments. This could therefore, depending on the tax rate, create, effectively, a punitive tax burden on education.

 

  1. Is the current system already effectively a graduate tax?

 

  1. With a graduate tax there is no guarantee that it will be used wholly to fund higher education; and, depending on the thresholds many graduates could end up over-paying the cost of their course. It would therefore be, in effect, a punitive tax on education. Unless the tax income was hypothecated to HE, there is no guarantee that the level of HE funding would be maintained. Also, funding would have to be allocated in a manner similar to the old annual HEFCE teaching grant – which would leave HEIs less sure about their funding year to year to deliver teaching.

 

  1. Another notable element of changes implemented to the funding system was the replacement of maintenance grants with larger, income-contingent loans for disadvantaged students.  This means that those students will graduate with debts of over £57,000. Dr Andrew McGettingan has argued that this has effectively created a tax on social mobility. In a comparison of two high-earning graduates, one from a prosperous and one from a socially-disadvantage background; the graduate from the poorer background will have an additional financial burden over the one from a financially prosperous background.

 

  1. The reintroduction of maintenance grants would recognise that for most students, and especially for those in London, one of the most significant barriers to attending university is the cost of living which, with spiralling rents and inflationary pressure on food prices, is often more than tuition fees. Such grants could guarantee a minimum level of support for all, with additional support means tested.

 

  1. We propose that the Government should introduce a means tested maintenance grant with a “core plus” model through which all students can access a core grant with an additional element being means tested.

 

  1. Should all university courses receive the same level of government subsidy?

 

  1. “Tuition” fee is something of a misnomer, as a significant proportion of these fees relate to wider university services such as library and other learner facilities, extracurricular programmes, student support, and other infrastructure. These costs are essentially the same for each student regardless of their course subject. The remaining “tuition” costs do of course vary particularly around laboratory based subjects with high levels or facility and technical costs. Broadly, the cost of “cheaper” courses is covered from the Tuition fees. More expensive subjects receive a small additional subsidy through direct government funding. However, this does not fully meet the cost of delivering these subjects which are subsidised by universities themselves largely through other sources of income like international students and commercial activities. This was the system created by the government and does not suggest market failure.

 

  1. The key area of market failure created in the current HE finance model is the dramatic drop in the number of Part-Time students, discussed in paragraphs 27-30.

 

  1. In 2014-15 only 18% of the funding for teaching came from direct Government sources. The majority of this funding is for STEM subjects, which are much more costly to run due to higher contact hours, laboratory equipment, the requirement of technician staff etc. Despite this many of these subjects still cause loses for HEIs. Grants from the government to fund teaching are expected to fall by a further £120m in cash terms by 2019-2020, following continual declines since the financial crisis.

 

  1. We would propose that the Government needs to increase the subsidy for STEM courses as the diminishing grant does not provide HEIs with the resources to deliver them which requires cross-resourcing.

 

  1. We do not feel that there is market failure however in not having differentiation in the prices of courses – such as an Australian style system. This would mean charging considerably more to both medical students and STEM students, despite there being an acute shortage of the latter in the UK. This could be exacerbated by a differential fee system.

 

  1. What impact have the 2012 student loan reforms had on the finances of the higher education sector?

 

  1. One key positive about the current funding system is that it has ensured a relatively stable income for universities during the period of austerity. This has allowed them to continue providing world-leading education. The higher fee levels have also seen increased spending on Access Agreements for Widening Participation – with universities spending 27.4 per cent of their income from fees above the basic level in 2015-16.

 

  1. One of the biggest failures of the 2012 student loan reforms is their effect on Part-Time students. Between 2010 and 2016 the number of students in England engaged in Part-Time undergraduate study in higher education has collapsed, dropping by 60 per cent. This decline has been accelerated by the introduction of £9,000 tuition fees in 2012. This also included a requirement for Part-Time students to commit upfront to studying for a whole degree if they wished to be eligible for a loan and to begin repayments from four years after the start of their course ie often before the course is completed. This has been particularly significant because mature students (which make up a large proportion of part-time learners) often already have family and financial commitments which can make them unwilling or unable to take on significant extra debt.

 

  1. Part-Time study, whether through distance learning, evening study or employer sponsorship, allows individuals to reskill or upskill, helping to address the UK’s skill and productivity gaps. The UK has the highest level of employment since 1975 but there are also more job vacancies that ever previously recorded, especially in STEM occupations. We are facing an acute skills crisis, with shortages in areas as diverse as engineering and social care, which can only ameliorated by providing opportunities for those already in work to upskill and reskill. In this respect in particular the financing of post-school education is failing the modern British economy. Any attempt to revise the funding model should attempt to reverse the sharp decline in part-time education.

 

  1. The decline has also hampered the Government’s social mobility efforts by reducing the opportunities for ‘non-traditional’ students to engage with higher education. The decline in Part-Time students has led to 13,760 fewer Widening Participation students attending higher education institutions – this equates to 1 in 5 WP students. Indeed, it is interesting to note that contrary to some claims, the total number of students from deprived areas is going down, not up, due to the fall in the number of part-time students.  The figures for English undergraduate entrants from these deprived areas fell by 15 per cent in the four years to 2015/16. This was driven by a 47 per cent fall in entrants studying Part-Time, which outweighed the 7 per cent increase in entrants from these areas studying full-time.

 

  1. Other interim measures which could help improve value for money for students are:

 

  1. How effective has the Government’s management of the loan book been and what are the incentives to maximise collection?

 

  1. Over £100m of debt repayment has been lost through graduates leaving the UK and choosing to default on their loans. The Government has only recently removed this exemption and started making attempts to recoup this money. The issue is exacerbated however by potential re-payers who are put off by their attempts to update the SLC on their circumstances by the fact that they only receive correspondence by post.

 

  1. Should the administration of collecting student loans be transferred to HMRC or another body from the Student Loans Company (SLC)?

 

  1. With consideration of: the dismissal of the SLC Chief Executive, their inability to receive electronic communications, the controversy around the use of false legal letters to threaten graduates, more recent controversies of the arbitrary use of penalty clauses and severe administrative struggles to cope with the current different loan plans; there is an argument to be made that the SLC is no longer fit for purpose and will not have the resources to administer a fundamentally revised student finance system.

 

  1. What are the implications of the sale or securitisation of student loans?

 

  1. Loan terms should be fixed at the point they are taken out. Whilst the government was entitled to vary the terms, variations of the threshold arrangements undoubtedly brought the system into disrepute.

 

  1. What are the implications of student loan repayments throughout an individual’s career on:

 

  1. The argument is often made that as most graduates will not pay off the entirety of their loans that it is not like ‘other debt’. Given the high interest rates and the inability of most learners to pay it off it still presents a financial burden for almost the entirety of an individual’s working life.  It represents, often, hundreds of pounds deduction to each pay cheque at a time when tenants in England pay an average of 47% of net income in rent. This effects young people’s ability to get on the housing ladder by making it more difficult for them to save for a deposit and by having their student loan repayments factored into their mortgage applications by banks. Research by Professor Claire Callender and Professor Geoff Mason has also suggested that debt aversion has the potential to put off young people from the poorest socio-economic backgrounds from applying to university.

 

  1. Is it clear to prospective students what they are signing up to when they take out a student loan?

 

  1. Given the multiple changes that have occurred to the loan system since 1998 and the numerous changes that have occurred to the loan conditions in just the last 5 years under the current funding system, we think it is very unlikely that all prospective students understand all of the potential conditions that they sign up to. This was demonstrated by news coverage earlier this year, for example, where many students were unaware that their loan would accrue 6.1% each year of their study or that leaving the UK for 12 weeks without informing the SLC can see their interest rate quadrupled.

 

  1. However, by-and-large, the student loan system offers the only feasible method for most learners to fund their degree. (Although as many as 15% are apparently funding outside the system). It falls on the Government therefore to ensure that the system is fair and transparent and doesn’t place an undue level of financial burden on graduates - further entrenching generational inequality.

 

 

 

December 2017