Is student debt still debt? It sounds like a tautology, but for some commentators, an income contingent loan payable after graduation is more clearly characterised – despite the defined amount of capital to be repaid – as a graduate tax’.
Certainly, fee and maintenance loans as currently offered by governments across the UK are very different from any other common financial product.
The debate on the merits (or lack thereof) of our current student finance regime is a favourite topic of debate on the pages of Wonkhe and in public policy circles. That debate has been revived by Labour’s pledge to abolish tuition fees – and during the election campaign, the topic has been tackled by more mainstream commentators.
For a brief overview of the arguments for and against abolishing fees, I recommend starting here.
The trouble with Labour’s manifesto pledge is that it starts with a simple mistruth. The claim that tuition fees have been a deterrent or barrier to accessing education for full-time 18 year olds is a red herring, and the claim that “last year saw the steepest fall in university applications for thirty years” is just plain wrong. There is only very limited evidence that debt aversion prevents access to full-time higher education, and the English sector has closed the entry gap between the most and least advantaged applicants since higher fees were introduced. This is an area vulnerable to significant misunderstandings.
Still, I’m aware that in pointing this out we are slipping into a familiar pattern of nit-picking when it comes to debating tuition fees. The income-contingent loans system, with its many variables and idiosyncrasies, captivates a certain type of wonk precisely because of its sheer complexity.
Understanding the ins-and-outs of the RAB charge, repayment thresholds, repayment obligations, and distributional fairness has become its own game, an intellectual forum in which wonks can show off new levels of obsession with detail to make a case for or against the system. For those looking for a deep dive into government accounting standards, Andrew McGettigan’s pamphlet for HEPI is the gold standard.
Left-wing critics of tuition fees – including the current Labour leadership – have a lazy tendency to resort to arguments about ‘access for the privileged’ and closing off access to the disadvantaged. Though there is a case to be made about debt aversion and socio-economic disadvantage (we’ll get to that), the facts are that higher tuition fees do not appear to have been a barrier to a gradual closing of the access gap in England, nor have their absence in Scotland been an enabler of it.
Given that there is a vast cost for abolishing fees – £11.2 billion according to Labour’s costing document – for what has been argued is a middle-class tax break, it is not unreasonable that the argument against the current student finance system needs to be stronger than the often-proffered red herring about widening access. Arguments over the distributional and widening access consequences of fees, while important, are only one side of the debate.
Debt without burden
As David Graeber explains in the early parts of his seminal book Debt: the first 5000 years, debt is a powerful and evocative concept, tied up with notions of fairness, obligation, and thus politics. ‘One should pay one’s debts’ is a profoundly moral (and therefore political) statement. To be indebted, or to have someone in debt to you, is fundamentally about a power dynamic between the two constituent parties. We talk about debt regarding ‘burdens’, ‘obligations’, and ‘bonds’. Indeed, the word mortgage comes from the French for ‘death pledge’.
The ‘rules’ of debt, and whether debt is considered fair or acceptable, are intensely political and are frequently contestable. The 2008 financial crisis, exposing the previous decades’ economic success for being built upon a shaky foundation of debts, has further politicised the concept. “Grants not debt”, the slogan of recent student demonstrations, carries with it no small rhetorical power in such a political climate.
Debt burdens as understood, whether mortgages, bonds, credit cards, or student loans, and are deemed affordable or unaffordable by the size of the repayment obligations of the debtor. In most debts, the repayment obligations are relative to the amount loaned and the rate of interest (or other loan charge). But with student loans, repayment obligations are largely determined by income, not the total debt that I owe (principal + loan fee).
This is an arrangement unique to student loans and creates the fundamental confusion at the heart of the system. I do not require a deposit or proof of income to take out a student loan in the first place. If I take a cut in salary or lose my job, I still have to pay my credit card company and my mortgage.* But I don’t have to keep paying back my student loan at the same rate, or perhaps at all if my salary falls below the current threshold. If I fail to pay back my mortgage or credit card bills, my credit rating will be ruined, and the bailiffs can pay a visit to ensure my obligations are met. But not with my student debt. The terms and conditions of my student loans only bind me to the debt in proportion to my income, and there is no store of value linked to the capital that a bailiff could repossess. That’s a very different kind of bondage to what we usually associate with debt, the kind highlighted by Graeber.
This is a point that has been regularly (and I sense exasperatedly) stressed by top student finance expert Andrew McGettigan. McGettigan is a prominent critic of the current system but is also critical of those fees-sceptics who propagate myths about how student debt works. To the vast majority of graduates, total debt and interest rates are irrelevant to their real financial outlook. This is not a debt in the conventional sense. But as McGettigan points out, misunderstandings about the system lead to outright falsehoods getting high profile media coverage.
Fees and student loans also fail – both on their own terms and in the eyes of their critics – to function as a “price” of higher education. As McGettigan points out, that the ‘cost’ of tuition to a student/graduate is not actually £9,000 a year. Tuition fees fail to create a price signal (as an undergraduate understanding of the role of the market may expect) because they are underwritten by an income-contingent loans system. Even as some universities are beginning to struggle to recruit, there are no reasons to drop their fees as a response. This is also why a price-cap is an essential part of the system. As long as the costs to the consumer (i.e. to graduates) are entirely income contingent, there is little incentive for providers to keep charges down.
But that isn’t to say that the headline figure of fees and debt cannot carry a moral or political implication. To ‘be in £60,000 worth of debt’ (plus interest) is a powerful statement to make. It can draw both sympathy and opprobrium, as the viral case of a University of Nottingham student showed last year.
Labour’s case for abolishing tuition fees draws upon this emotional narrative, but it only serves to perpetuate the mistruths about how student loans actually work. A generous reading of the Labour left’s obsession with tuition fees infers that there is a sympathetic aim here: to relieve the burden on the penniless student struggling to pay rent or feed themselves, and to reduce the marginal tax rate for middle-to-lower earning graduates themselves. But outright abolishing fees would not achieve either of these objectives.
A less generous reading is that the current Labour leadership do not understand (or do not want to understand) how student loans actually work. Spreading mistruths only adds to a growing mistrust in the system and may drive students and their families towards far more pernicious funding arrangements.
Neither tax nor debt
So tuition fees and student loans are not quite a debt as conventionally understood. But by railing against the “debt cloud” (as Jeremy Corbyn put it) many critics of the system show a profound misunderstanding of how it works.
Defenders of the system who equate student loan repayments to a marginal tax rate are not quite right either. Unlike student loans, tax rates cease to apply when you move abroad, and taxes don’t (typically) expire after a set amount of time spent paying or a certain amount of tax paid. One cannot ‘opt-out’ of paying tax, but going to university (or not) is a free choice to be made. There is no ‘upper limit’ to the amount of income tax that an individual could conceivably pay before being told: “that’s it – you’ve paid your fair share now”. This, for all the relatively progressive features of the current loans system, makes it less progressive than income tax, as the highest earners have an upper limit on how much they can pay (and for how long). Indeed, students from very high-earning backgrounds have the option to pay off their fees early – an anti-progressive option meaning that those who are less wealthily endowed end up paying substantially more in interest.
There is also an argument to be made – though how one would quantify it is entirely unclear – that an increase in graduates’ disposable income would have a knock-on effect on the wider economy and thus the tax take. Students are, effectively, earning less than they would otherwise – leaving them with a longer and more uncertain path to a mortgage, and less to spend on everything from transport to food to leisure, all of which bear VAT and other taxes.
And then there is the matter of retrospective changes to the terms and conditions of loans, including to repayments. Under the ‘debt’ interpretation of student loans, these are unjustifiable: a contract signed on taking out a loan should not be unilaterally altered by the creditor (i.e. the government). As Martin Lewis puts it, the move risks “fundamentally threatening any trust people have in the student finance system”. Those who equate loan repayments to a marginal tax (such as Nick Hillman) argue that “taxes change each year” with different ministers and governments. As pointed out by John Thompson – by making retrospective changes, the government has shown that the ‘tax-like’ features (such as progressive income contingency) of loans are not in-and-of-themselves guaranteed. This takes us beyond the realms of the conventional policy making: we are now into “meta policy”, maybe even “quantum policy”.
Confused yet? You should be. We haven’t even got to how loans are accounted for in the public finances, and how it distorts conversations about the national deficit. You could read McGettigan’s excellent HEPI pamphlet ten times over and still be left with gaps in understanding. This will only matter more and more as the loan book grows, to a gargantuan £1 trillion in cash terms by 2045. Loan repayments will equate to over £8 billion a year by then or roughly 0.45% of UK GDP.
When a significant proportion of income taxpayers are on the student loan book in roughly twenty years, the student debt will be an area of policy with an even greater amount of political weight. One criterion of effective public policy should be the ease by which it is understood by the general public By this measure our current university and student financing model fails miserably.
Commentators such as Stephen Bush are right to argue that any consideration of tuition fees must be aligned with wider consideration of the progressiveness of the tax system. But this only looks at fees from the view of the Treasury.
There are also the policy consequences of a fees and market system for universities to be considered. Fees (along with uncapped numbers) have emerged as the sector’s preferred policy solution to higher education funding because the current generation of vice chancellors would prefer – as much as is possible – to have their budgets be subject to the instabilities of the market than the unstable whims of ministers and the Treasury.
Opponents of fees, whether they support a form of hypothecated graduate contribution or not, need to refine their objections to this, and sooth vice chancellors’ fears that a return to a grant funded system would ensure relatively stable long-term funding compared to fees and the market.
The sheer complexities of the current system seem a strong enough argument to make a case for reform. Indeed, what evidence we have about debt aversion amongst relatively disadvantaged prospective applicants seems to suggest that confusion and misinformation – perhaps unavoidable in the way student loans currently function – can be a deterrent to access. But this evidence is still relatively marginal when compared to the visible increase in relatively disadvantaged students accessing higher education in recent years.
The obsession with fees also obscures the arguably greater challenge of inflating student living costs, far more likely to be a barrier to entry for the less privileged. This is proving to be a more pertinent challenge across the UK, with debates in Scotland about the correct balance between state support for tuition and loan outlays for maintenance. Meanwhile in Wales, an innovative system of finance focused on a generous maintenance outlay and grants for disadvantaged students seems to be a politically acceptable middle ground for the relevant stakeholders involved: taxpayers, centre-left politicians, students, and universities.
The solution to all of this is not immediately obvious, and it is rare that one encounters someone in this debate who isn’t arguing with a preconceived idea of what the system should look like: ‘free’ tuition, graduate tax, income-contingent fees, or unchained market. But an informed debate would be a nice start, and the characteristics of our university funding systems appear to make this very difficult.
There might be some very good arguments for abolishing tuition fees, but ‘relieving the burden of debt’ for young people and widening access is probably not one of them. Abolishing fees won’t magically mean that “all young people to have a chance of going to university”. As I’ve written on Wonkhe before, solving the access conundrum is much more of a challenge than that.
Debt: the next 5 years
The interesting flipside is that fees have burdened the university sector with debt but in an indirect way. Market competition, combined with the removal of grant and capital funding, has led to a borrowing spree by universities themselves to finance growth, redevelopment, and in one case complete relocation. Universities’ own debts are now so tied into the wider fluctuations of capital that several received a credit-rating downgrade in the aftermath of the EU referendum.
Despite vice chancellors’ protestations a few years back that our new labyrinth funding system is sustainable, HEFCE’s recent evaluations of the funding environment have not been quite so optimistic. Several institutions are beginning to run unwieldy deficits as the pressures of the market (both foreign and domestic) begin to bite, often investing more in marketing gimmicks than improving the quality of their product, as well as more aggressively leveraging their borrowing. Universities unable to service their debts will still be bound to them. But despite what Jeremy Corbyn might argue, their graduates (quite rightly) are not.
*This is obviously illustrative. I live in London and am in my 20s. Of course I don’t have a mortgage.