Nick Hillman: Three options for higher education. Less support for students, fewer of them – or else they pay more

10 Nov

Nick Hillman is the Director of the Higher Education Policy Institute and a former Special Adviser to David Willetts during his time as Minister for Universities, but this piece was written in a personal capacity while he was on annual leave.

Politics is governed by the rule of three, whether it is Blairite rhetorical flourishes (‘Education, Education, Education’) or policy options provided by civil servants to Ministers (generally one good, one bad and one ugly). Even Brexit was a three-headed beast: Remain, Deal or No Deal.

This lesson was rammed home for me when working on pensions policy in the early 2000s. Adair Turner was tasked with finding a solution to the ‘pensions crisis’ and he liked to make it sound deceptively simple by saying there were only three solutions: more taxes for bigger state pensions; a higher retirement age; or people saving more. He recommended all three.

Ministers similarly claimed there were just three options when, a decade ago, the Coalition was looking for ways to save public spending on higher education in England: fewer students; less spending on each student; or higher fees backed by higher loans. They rejected the first two options, as had New Labour before them, and announced much higher fees.

The changes delivered a settlement that has stood the test of time. The Cameron/Clegg £9,000 tuition fee system has already lasted longer than the £1,000 fees of 1998 to 2006 and the £3,000 fees of 2006 to 2012. It is likely to survive longer too, as promising to end student fees has little electoral appeal: it didn’t work for Michael Howard or Jeremy Corbyn.

But the reason £9,000 fees delivered savings to the Treasury was the way that student loans scored in the national accounts. To cut a long story short, tripling fees and loans to £9,000 in 2012 reduced the deficit (though it still increased the national debt). This was because accounting standards said repayable student loans did not count as current public spending.

Some accused the Coalition of using financial trickery. In one light, the new system looked like win:win, as it enabled more support for universities and big savings for the Treasury. In another light, it looked like lose:lose, as students accrued larger debts while the Government still faced high costs in the long term because of larger loan write-offs.

Either way, the bigger fees prompted an angry response. Exactly a decade ago, in November 2010, fierce student protests on the streets of London targeted CCHQ, the Cenotaph and even the Prince and Princess of Wales. Yet the arguments of those who opposed the system were hugely overcooked.

Yes, the progressive features of the student loan repayment terms mean some money is never repaid. But, as David Cameron’s memoirs make clear, higher fees and loans allowed for the removal of the student number cap. And more graduates mean more tax. The OECD said the loan write-off costs ‘are just a tiny fraction of the added fiscal income due to better educated individuals paying higher taxes.’

Anyone who still believes the wool was pulled over people’s eyes back in 2010 should remember there is only one thing worse than politicians keeping to standard accounting conventions – and that is politicians ignoring standard accounting conventions. Gordon Brown tried to do this on tax credits, and all governments would try similar tricks if they could get away with it.

Nonetheless, the debate over student finance is far from over because two big things have happened since 2012.

First, in a wasteful and opportunistic announcement at the 2017 Conservative Party Conference, Theresa May relaxed the already loose student loan repayment terms. By increasing the repayment threshold to £25,000 (up from £21,000), she ensured that a significantly lower proportion of public money lent to students would be repaid.

Second, and in part because of this increase in the repayment threshold, the accountants changed their mind. Now, the portion of any student loan that is expected to be unpaid counts as in-year government spending when the loan is taken out. Osborne saved billions overnight via £9,000 fees (as well as the subsequent shift from maintenance grants to larger maintenance loans), but the new rules reverse those savings.

In March 2020, before the pandemic let rip, the Office for Budget Responsibility said that the reclassification of student loans was a key factor in pushing the UK’s financial forecasts for 2023/24 and after from the black and into the red. The inclusion of so much student loan outlay in the national accounts has therefore put spending on students on the radar for the coming spending review.

As the financial commentator Paul Wallace warned in Prospect last year: “The Treasury was happy to countenance a big expansion of university finance when it did nothing to blemish its scorecard in reducing the deficit. It will take a sterner view once the actual costs show up in the budget deficit.”

We are also awaiting the official response to the Augar review of post-18 education. Among its many recommendations, this included ways to reduce taxpayer exposure to tuition fee loans, such as via a lower fee cap of £7,500 and a longer student loan repayment period (up from 30 to 40 years).

Once again, the Government is facing three options: providing less money per student through lower fees and loans, which would drive some universities to the wall; reducing student places, just as the number of school leavers is about to start a decade-long growth; or tougher student loan repayment terms, which would mean paying a little more. None of these options is palatable.

If it were down to me, I wouldn’t cut education spending at all. The triple whammy of Brexit dampening down skilled migration to the UK, economic change wrought by the pandemic and higher unemployment among lower skilled people in the coming recession mean we should be investing as much as we can in all types of education. More education is always better than leaving people to build blank spaces on their CVs.

Yet if the higher education sector must take some further pain in the spending review, then tougher student loan repayment terms of the sort in place in other countries and of the type recommended by the Augar panel is a better place to start than pushing universities to the brink or blocking aspirational learners from enrolling in higher education.