Chris Skidmore: Student finance? It’s the interest rate, stupid.

17 May

Chris Skidmore was Universities Minister twice between 2018-2020, and is Co-Chair of the All Party Group on Universities and Chair of the Res Publica Lifelong Education Commission. He is MP for Kingswood.

News that there is to be a consultation on the fee level for university suggests that proposals in the Augar Review to reduce the annual fee level for university courses to £7,500 are back on.

Ever since the Office for National Statistics judgement in 2018 that student debt would need to be classified as part of the Government’s debt, the move to reduce the amount owed by students has been viewed as an attractive means of reducing this eye-watering burden in the future – especially with the student loan book estimated to rise from £140 billion in 2020 to £560 billion by the middle of the century.

Yet for every policy change, there are both winners and losers. Effective government is about ensuring the losses do not counteract the perceived gains. Reducing fees and, in turn, the total amount that universities can spend on course provision will place the sustainability of many university courses under scrutiny.

Science degrees cost more than the current £9,250 a year to provide, with most being subsidised by arts, humanities and social science degrees. Unless careful thought is given to the impact of the unit of resource, what seems an attractive headline offer might in fact backfire – especially if it results in a loss of opportunity for future students in regions of the country who find that their local university is no longer able to provide the course provision they wish, not only in the arts and humanities, but in science degrees, too.

In addition, out of the current fee level, universities themselves invest around over £800 million a year in improving access and participation from some of the lowest socio-economic groups to attend university. With a reduction in fees, there is also a risk that the ability to reach out to the most disadvantaged in society is also reduced.

This is not to say that a rebalancing of fees, especially if we want to create an effective tertiary ecosystem which allows learners to move between further and higher education, cannot work. Indeed universities should be preparing for this realignment and in addition should work with the government to help deliver more Level Four and Five course provision and Higher Technical Education, which I believe they are well placed to do as anchor institutions in their local communities. Just look at the work of Nottingham Trent University and their partnership with Mansfield College, or London Southbank University’s work on apprenticeships and skills.

But if we are to reduce university fees, then there is also an important policy lever which the Government should also be looking to change, which I believe would have far greater impact on individual lives— and in turn far greater support. To paraphrase James Carville, when it comes to higher education funding, it’s the interest rate, stupid. We need to look again at the interest rate charged on student loans, which any student or parent will tell you is out of all proportion to the reality of current interest rates.

Particularly there is to be an expansion of student finance into wider post-18 education, involving not only university but further education and modular flexible courses, the issue of the interest rate on student ‘loans’ must be looked at. At 5.6 per cent, even with the taper, it remains out of all proportion with the current 0.25 per cent rate.

Now, with this debt placed on the Government’s balance sheet following the ONS decision, a revaluation of the interest rate for student loans would seem sensible, for the Government’s twin goals of improving access to education and to address the actual size of the debt owed itself.

The current situation is also entrenching unfairness, preventing students from low-income backgrounds from ever getting out of their debt trap. Yes, they may not have to pay their student loan back until they earn more than £26,500, yet this in itself is a cap on aspiration – potentially trapping these students in median earning jobs for the rest of their lives, for the fear of paying back their student debt.

Even if students begin to pay off their debt, the interest rate, as it currently stands, results in them either never paying off their loan, or ending up paying back over double what their actual degree cost.

Currently, for an individual in higher education on Plan Two with £50,000 worth of debt, even with a graduate starting salary of £28,500, rising to £56,900 over 30 years, they will never pay off their loan – with the eventual interest rate of 5.6 per cent accruing eventual debt of £113,000.

Never mind that they would never pay off their debt, having seen it cancelled after reaching the repayment threshold of 30 years: the eye-watering fact is that interest itself becomes 68 per cent of the total debt.

This begins to kick in even as the student is studying and unable to make repayments: last year, a third-year student will have had £1680 added to their existing debt through the application of interest alone. By contrast, students from wealthy backgrounds can pay off their loan immediately, with no debt interest repayments to face, resulting in the wealthier getting a cheaper university degree.

Further to this, the Sutton Trust has demonstrated that for the most deprived 40 per cent of students, average debt is nearly £52,000, compared to £38,400 for the top 20 per cent, driven by access to maintenance loans. Maintenance loans now make up £7 billion of the £17 billion borrowed each year, up from £5 billion four years ago.

Returning to a system of means-tested grants rather than loans accruing further debt would help encourage learners to access post-18 education, particularly for those from backgrounds for which debt, regardless of how it actually accrues and whether it is paid off, will be viewed as a disincentive and a barrier to reskill.

At the same time, we should be investigating new methods of funding reskilling and upskilling. The success of research and development tax credits in generating this activity points to an opportunity for how companies could be rewarded for investing in the human capital of their employers, especially given the opportunity to close the productivity gap that lifelong learning might offer.

I am currently investigating all of these issues as part of the Lifelong Education Commission, which I have established with Phillip Blond at Res Publica, which will be producing a series of reports on how we can reform our education system to remove barriers to learning.

Just as we need to look again at what barriers within the learning system, whether legislative or regulatory, qualification based, or institutional, are preventing increased access to educational opportunity, or the need to look again at the opportunities for change that technology and remote learning can provide, so too we will need to address what is, and always will be, the greatest barrier to uptake: finance.

Taking the opportunity to address interest rates now, what is one of the greatest perceived injustices in the student finance system, could be a potential game changer, delivering fairer education provision and achieving universal support.