Simon Marginson is Professor of Higher Education at the University of Oxford and Director of the ESRC/RE Centre for Global Higher Education

England has a distinctive higher education tuition system – based on student loans with income contingent repayment.

The high tuition charge is hard on students and might have blocked access and choked off the growth of opportunity, but income contingent repayment enables no fee barriers at point of entry, and a socially equitable sharing of the burden.

Income contingent loans (ICL) are not normal commercial loans. The taxpayer ultimately covers the cost of the education received by graduates who do not earn enough to trigger the full repayment. Higher education expanded significantly after the 2006 ICL reforms and again after tuition was ramped up to a ceiling of £9,000 per full-time student year (it’s now £9,250) in 2012.

But the taxpayer cost is uncertain and large, the high fees also loom large – they will never be popular or widely accepted – and the system is fiscally and politically unstable.

Where does the ICL system go from here?

Public private partnership

As I see it the underlying principles of ICL-based tuition are widely understood and agreed: shared public and private funding, recognition that the student benefits and the student ultimately pays, no cost barrier at point of entry, the actuality and timing of repayment determined by individual capacity.

But the present system works well for no-one. Not students, not graduates, not higher education institutions, and not government.

It certainly doesn’t work for Treasury. The accumulated value of student debt fluctuates wildly according to macro-economic shifts and policy tweaks in the system. The RAB charge is like a bull in the china shop of public finances. A sudden tweak to buy votes, as when Theresa May raised the repayment threshold in 2017, detonates all reasonable forecasts.

Repayment thresholds, interest rates and fee indexation have all been tweaked and it seems only a matter of time before the standard fee level is cut overnight to contain public borrowing costs, throwing university incomes into chaos with differential effects across the higher education system.

For individual students and graduates, the system provides less certainty and predictability than it could and it should. The headline fee is also very high relative to other tuition systems across the world outside the United States, and relative to living standards which have stagnated and can be expected to deteriorate in future.

In its present form the system is always vulnerable to politicians “doing a Corbyn” and promising to cut the cost burden on students by transferring it to institutions, thereby wiping out the one clear gain that was achieved by the 2012 reform package – its shoring up of university finances and quality, including the institution-based conditions that support research.

Instability in the system

Who are the advocates for the system as presently designed? It is always teetering on the edge of implosion. We have become used to this but we should not. There is a lot at stake. There will always be tweaks in an ICL system, these systems offer many levers for chancellors of the exchequer to pull, but the element of short-termism and risk in the ICL system in England has become too high.

This is not only because the economics are not right – it is because the politics are not right. What needs to be addressed is the broader political settings, the public/private balance and the nature of the implicit social contract that underlies higher education.

The reforms that are needed will have to cut deep. We have become used to the idea that the only possible policy strategy is to tweak one or more of the constituent elements of the system, making changes that do not go to the root. However, for the first time in over a decade, the likely election of a Labour government in 2024 (which must be a better than a 50 per cent chance as things stand) allows us the opportunity to think about a system reset and reboot.

A new government with a remade base of political support would have a window of one to three years in which substantial reform is possible. This would allow Labour not only to move back towards the pre-Cameron balance of public and private goods in higher education, but to do so in the context of a redesigned tertiary education system.

To lift further education and apprenticeship and integrate them effectively with higher education requires serious money and a restructuring of the tuition loans system enables resources to be moved around.

Recognising public benefits

David Willetts, who presided over the 2012 £9,000 fee ICL package, was a pro-university, pro-science and pro-culture Minister. Higher education in England is forever in his debt for his implementation of an ICL system that triggered a major flow of additional resources that shored up the sector. This cushion made it possible to handle successive shocks: a half decade near freeze in the growth of international student visas, Brexit, and then the freezing of the level of tuition, whose value is rapidly being eroded away by inflation.

But the 2012 reforms carried major flaws.

Tuition was set much too high, the RAB charge accumulation (the forecast of unpaid student debt paid for by the public) was too large and unpredictable. Most fundamentally, the nominal 100 per cent individual funding of the non-STEM non-medical student places undermined the principle of shared public and private cost and benefit that underpinned Labour’s 2006 ICL reform and made it saleable.

What does the principle of 100 per cent individualised funding tell us? This was a wholesale surrender to the claim of solely private benefit, “no such thing as society”, the complete dissolution of higher education into the market principle as absolute. This is now what the student and the public see when they look at higher education. This is the headline. Not the shared public/private funding implicit in the subsidisation of free access, not the delayed repayment and not the non-payment by low income earners.

Individualised funding indicates that the individual public goods received by students – those personal benefits that are not captured in earnings and rates of employment such as immersion in knowledge, self-formation and personal growth, and campus life – are of no value and consequence in English higher education. These personal gains are unfunded and ignored, provided – if they are provided at all – only as incidental outcomes of the consumer market transaction. The political conclusion for students is that they should understand and experience higher education in the narrowest possible terms.

And the political conclusion for institutions is that they should focus only on graduate jobs and earnings, except to the extent necessary to entice students to sign up as consumers. That is more effectively done not by providing them with a rich environment for self-formation, intellectual learning and growth, but by focusing on institutional prestige in the rankings, and via marketing. Marketing the service is cheaper than lifting its quality.

Funding public goods

Completely individualised funding means that the collective public goods generated in higher education are unfunded, and hence the impression is given that they do not matter.

This is not a small list of public goods. It includes higher education’s lifting of the threshold of social, scientific and technological literacy, the combined public health gains in an educated population, the economic and civic building and strengthening of cities and regions, the fostering of active and responsible citizenship and political connectedness, the fostering of cultural flexibility, social tolerance, international understanding and so on. These public goods are all attested repeatedly in research as outcomes of higher education.

The political conclusion for the public, deduced from 100 per cent individualised funding, is that only individual students and graduates benefit from higher education. The public as a whole does not benefit. Those who do not attend higher education gain nothing, except perhaps a trickle down from funded scientific research, and the subsidisation of the right of younger members of their families to access the system. That is not a small benefit, but it is the only benefit to the public that is attached to the ICL-based tuition system.

And in this policy setting that one remaining public benefit, the subsidisation of access, is highly vulnerable. Why should the public fund continue to finance unpaid tuition debts when the public good principle has been evacuated by the principle of 100 per cent private funding and private benefit?

The longstanding implicit social contract underlying the sector, whereby higher education is seen as a system of common institutions that work for the good of the community now and in the future, was largely lost in 2012. The complete surrender to market ideology has undermined higher education long-term, increasingly disembedding it from its social conditions until the time when the shared public/private principle is forgotten.

The 2012 reforms junked higher education as a public benefit, a public asset, a public responsibility and publicly accountable. The restoration of a shared public and private compact on tuition would allow all that to be rescued and sustained.

What could a new government do?

There are a broad range of political economic configurations of higher education across the world, and the quasi-markets now favoured by anglophone governments can be varied in the extent they take in social democratic elements.

For example, the Australian system of ICL in higher education has suffered numerous tweaks and will continue to do so, but its underlying political conditions have been respected. Its headline fees vary by discipline, in a semi-rational manner, but are significantly less onerous, less intimidating, than in England.

In Australia the private proportion of funding has risen since ICL began in 1989 at the level of 25 per cent of average course costs. But the system has maintained the principle of shared public and private benefits and costs with which it began and has thereby sustained its acceptability with institutions, the public and students.

The solution for England is to move to the economic and political centre and establish a new and openly declared balance between private costs to the student, and public subsidies. Every teaching place should be subsidised. Nominal 100 per cent private benefit must be abandoned.

Assigning an economic value to public good externalities is essentially assumption-driven. It is arbitrary, as economists who have attempted this are well aware. The calculations that would underpin a new balance between private and public cost are political calculations not economic calculations. Politically this is a win-win in several ways:

  • It is win-win for the treasury to shift part of the public subsidy from unpredictable and unstable loan debt to predictable direct subsidies of student places, and to markedly increase the overall proportion of student debt that is repaid
  • It is win-win for higher education to stabilise its funding and its social compact with the public, and to diminish the threat of headline reductions in fee levels
  • It is a win-win for students and graduates because it lowers the size of the annual tuition charge, lowers the size of the intimidating prospective debt burden at point of entry, and diminishes lifetime repayments.

It could be argued that a restored direct subsidy of every student place would be vulnerable to Treasury cuts. I agree. But it would be no more vulnerable, probably less vulnerable, than is the present system, which faces arbitrary cuts to tuition levels and hence to institutional income in order to contain the accumulating student debt.

Adapted from paper to the Centre for Global Higher Education seminar on “The Dearing Report 25 years on: Student loan reform in U.K. – Did it work?“, UCL Institute of Education, 4 November 2022

4 responses to “How could income contingent loans work better?

  1. Agree with all of this, except, you forgot an entire group of beneficiaries from HE: Industry. It is very appropriate that within a new funding model, those organisations who benefit directly should shoulder some of these costs. At present there is an Apprenticeship levy – and maybe organisations should have a choice as to whether this funding goes into HE or into Apprenticeships (of course with HL Apps it does usually go to HE).

  2. “the underlying principles of ICL-based tuition are widely understood and agreed”

    No, they are not widely agreed. They are overwhelmingly rejected in Scotland.

    Even the Tories (Scottish Conservative and Unionist Party, as they call themselves north of the border) dropped their previous support for “ICL-based tuition” from their manifesto for the Scottish Parliament election of May 2021. Virtually no-one in Scotland is in favour of introducing it.

    But the challenge for the “Scottish fiscal model” of HE tuition is that Scottish Government funding for taxation-based tuition is limited by the scope of their only marginal tax powers and by the swings of the Barnett formula, as England plays pendulum with the RAB costs. This means that over the last decade the funding has gone down in real terms, and therefore, as the Scottish Parliament heard last week, the only thing keeping the insolvency wolf from the door of Scottish HEIs is overseas and RUK recruitment.

    So, if we are to retain democratic principles over the right of Scotland’s people to determine their own higher education policy, the only solution is … independence. Plus, as a bonus, we also get the right to rejoin the EU’s ERASMUS+ and Horizon programmes, undemocratically taken away from us by England’s Tories. In the longer term, the alignment will be with HE fiscal policies across the rest of Europe, rather than the bizarre contortions of a Thatcherite UK state focussed on a policy for England that, as the author points out, does not even work for England yet alone the rest of us that didn’t vote for it.

    The sooner HE policy wonks in England get their heads round the fact that Scotland is inevitably heading for the exit down of “UK HE” the better. And I wouldn’t put money on Cymru/Wales and the north of Ireland being far behind.

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