The cost of free higher education

Calculating the cost of fees is not as easy as it seems

David Kernohan is Deputy Editor of Wonkhe

What the widely expected Labour retreat from abolishing tuition fees amounts to is the cost of the endeavour.

In straitened times, goes the argument, is removing tuition fees really the best thing to spend money on given all of the many, many, many other areas of the public sector in need of a cash injection. The pot, after all, is limited in size and there is no magic money tree.

But how much money are we talking? In the grand tradition of political debate there are many answers, and I present all of them here (at 2021-22 values, looking at undergraduate fee loans only) so you can choose your favourite.

Annual spending per year: £10.3bn

Statistics from the Student Loans Company suggest that the provisional amount of undergraduate fee loans paid out over the 2021-22 academic year reached £10.3bn. This includes loans for full time and part time study, and the remaining fee loans due to EU nationals in the undergraduate system. This is a single year of spending, relating to a single year of a course for all the students in the system at this point. It does not include postgraduate fee loans, if it did we would be looking at more than £11bn. HESA Finance data broadly concurs with this figure for fee income.

Cost per cohort: £15.4bn

But of course, even given the noble aims of the Lifelong Loan Entitlement people tend to sign up for full courses rather a single year of study. For this calculation we need to think about the cost per cohort. We can’t just multiply the one year figure from the SLC by three, as it includes spending on fees for all undergraduate students in the year in question. We do know that 580,000 loan-borrowing students entered higher education in 2020-21 – and the average fee loan per year for 2021/22 was £8,850. If we assume these are all three year courses (not a particularly safe assumption, and there is) we get £15.4bn.

Subsidy adjusted, per cohort: £10.6bn

It’s a little understood feature of the English finance system, but the government does currently subsidise fees by waiving repayments after 30 years (as Jim notes on the site, this is soon to rise to 40 years). It feels like double counting to include money the government already intends to pay out, so we can remove it from our total. For 2021-22, the government expected to subsidise 44 per cent of the total value of all full time loans (and 33 per cent of part time loans). These are sketchy, finger-in-the-air figures at best, so I’ve just used the full time one to reduce our cost per cohort calculation. If you use it on the cost per year calculation, you can get to £6.8bn this way.

Forecast outlay, subsidy adjusted, per year: £12.5bn

The government’s own forecast outlay is probably more accurate than the rough approximations I’ve been making thus far – including full and part time loans gets us to just under £19bn. And because we have the split between full and part time outlay there for us we can apply the expected subsidy rates properly too.

Other considerations

There was a suggestion at one point that a Corbyn-led government would both abolish fees for future students and cancel fees for those who already have them. It was a fantasy politics moment, an off-hand remark in an interview – but the cost of zero-ing the student loan book would have been about £162bn in 2021-22 and is forecast to rise to some £333bn by 2027-28. This, of course, includes maintenance loans and postgraduate loans because – at this point – why not? In comparison, the average annual spending on Education comes in at about £95bn.

I’ve completely ignored maintenance loans – an issue deserving of far more attention than fee loans. I’ve also assumed that other income streams (eg via the Office for Students) remain as currently.

We should also really consider where the money actually comes from – and for student loans it comes from government borrowing rather than directly from taxation. The current system relies on the government’s ability to borrow money more cheaply than individuals, providers, or private banks – despite the best efforts of Liz Truss this still remains the case. Government borrowing works via the sale of Gilts – effectively promises to play a fixed fee every six months. plus the face value is returned at the end of the term.

This borrowing needs to be service, no matter what happens with government spending. In other words, there is no way just to unilaterally cancel government borrowing – so if the government has borrowed money to lend out that arrangement is equally hard to cancel unless you have an alternative income stream to hand.

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