Is it time to end the current system of student loans?

A major Whitehall tussle is in progress over student loans writes Paul Ormerod. The Treasury is increasingly concerned about the implications for the public finances.

The principle of the loans seems simple. Take one out to cover the cost of your student years, and then pay it back when you start to earn a high salary.

But it practice it just does not work like that. Nothing needs to be repaid until you earn £27,205 a year. The problem is that a lot of graduates are not making this amount. And they never will.

A key argument underpinning the massive expansion of universities, initially under first John Major and then Tony Blair, was that there was a “graduate premium”. A university level education would lead to a better job with increased lifetime earnings.

At the time, a minority of economists made the obvious point. A big increase in the supply of any product – in this case, graduates – would eventually reduce its price.

This is exactly what has happened. The total amount of student debt outstanding is now almost £140 billion. Around a half of this will never be repaid because many graduates will not earn enough. Their price – their salary – has been reduced.

Going back fifty years, barely 10 per cent of each age cohort went to university. It was a different world. Far from having to take out loans, students were actually paid grants by the state.

Essentially, higher education was seen as a public investment good. A small minority needed a high level of training to fill the elite jobs which were available.

The individual students benefited, but in general they did go on to earn relatively large amounts of money. They effectively repaid the investment made in them through paying a lot more in tax.

For many students, higher education has changed fundamentally into personal consumption.

The taxpayer gives them money to enable them to spend three years following undemanding courses and generally – Covid excepted – having a good time. And the money is never repaid.

Universities make a song and dance about equality. But the current set up is profoundly unequal.

In terms of the distribution of intellectual ability, the bottom fifty per cent do not get to go to university. The top fifty per cent do, but this is split into two bands.

For roughly the top 25 per cent, the principle of higher education being a public investment good still holds. It is those in the 50 to 75 per cent ability band who get subsidised by the taxpayer. And some of these taxes are being paid by the bottom 50 per cent.

The idea is being floated of requiring students to obtain a particular set of A level grades to qualify for a loan. But this would eventually be undermined by exam boards lowering standards to meet demand, and a further bout of grade inflation.

Students on good courses and at good universities could readily obtain loans in the free market.

It is time to end this grossly inequitable situation and phase out rapidly all taxpayer loans to students.

You can find more of Paul Ormerod's comment pieces on his own website which is here