The Future Funding of Higher Education: another intergenerational mugging

Antony Mason is concerned that the government’s current plans for universities are deeply flawed, will damage a key sector of the economy – and won’t even reduce the deficit. And it’s the next generation that will have to foot the bill.

At the Intergenerational Foundation, our main aim is to impress upon government the need to address the long-term legacy of its policy-making, and to ensure that it does not simply shift the costs of current spending to future generations. But this is precisely what seems to be happening with university funding, the subject of the “Higher Education White Paper – Students at the Heart of the System”, published belatedly last June.

Repositioning students

Higher Education was once considered to be a public good, for the benefit of society. But students are now being recast as a burden to the taxpayer. To accommodate this attitude, Higher Education is going to become a consumer product for which the consumers themselves – the students – will have to pay. And in the modern world, the consumer is king – “at the heart of the system”.

Universities are entering uncharted territory, and the outcomes are unclear. And it is far from certain that the main purpose – to cut expenditure in the battle against the deficit – will actually work.

Ramping up individual debt

From next year, most UK graduates are going to be locked into debt for most of their working lives.

Loans for three years’ tuition fees and maintenance are likely to amount to about £43,500. That is very big debt mountain to climb at the beginning of one’s working career. Where is the morality in that – especially coming from a government that claims to be tackling the problems of both public and personal debt?

Under the present repayment terms, to pay back a loan of £43,500 in full over 30 years a graduate will have to earn about £40,000 from the start – a salary that is nearly twice the national average wage (currently about £24,000).

Coalition MPs like to cite the generous terms of the loans. Graduates won’t have to pay any loans back until they are earning over £21,000. And all outstanding loans will be written off after 30 years.

This is certainly generous to those who will never earn very much, or indeed never plan to. But it is not so generous to the middle-ranking earners who exceed the £21,000 threshold: they will be obliged to pay back the loan at an annual rate of 9% of their income in excess of £21,000. All the while, the loan will be increasing with interest charges at RPI (currently at over 5%) plus an additional 1–3% on a climbing scale. That is why it will take 30 years for a relatively high-earner to pay off his or her debt.

Graduate premium?

Some argue that taxpayers should not have to fund the privileges that students gain by going to university. The so-called “graduate premium”, the notional amount that a degree is worth over a career, was estimated to be worth on average about £100,000 to every graduate, but the government is currently reviewing this very broad-brush figure.

And with good reason. Many graduates do not do high-paid jobs. The Office of National Statistics recently reported that the median salary of graduates aged 22–64 was £29,900. On that kind of income, a graduate would stand no chance at all of paying off a full student loan.

Many graduates do earn considerably more than this, however. Government statistics, published in the Impact Assessment for the White Paper, state that the exchequer gains an average – average – of £80,000 more per university student in tax and National Insurance benefits over a career. But if this is the case, we have a system to recompense the taxpayer: it is called income tax.

Deficit reduction?

The government has chosen not to pay for higher education through traditional tax-sourced funding. Instead it has chosen a loans system. Will it work?

The government itself estimates that about 40% of students will never pay off their student loans in full, and that it will have to write off 30% of the amount loaned (other analysts have suggested that this is more likely to be 50%).

Remember that the prime motif for the “marketisation” of higher education is deficit reduction. So the students have to pay for their education, right? Wrong. The government will not in fact be taking money from students, but will be creating a massive loan book, ultimately funded by taxpayers.

It is estimated that the first year in which this loan book will stop growing and begin to diminish through funds being paid back will be 2047 – 35 years down the line. By this time the total student loan book will stand at an estimated £191 billion.

In other words, future generations are going to be left with the bill which will take many further decades to pay off. It is very likely that no – or very little – deficit reduction will actually have been achieved. Except perhaps on paper: in accounting terms loans are considered to be assets.

In Parliament, it seems that many MPs are having serious doubts about the viability of this scheme. The sums have simply not been properly calculated, and some revision will be required.

Meanwhile, a considerable amount of uncertainty hangs over the higher education sector – uncertainty that is likely to undermine confidence in the whole system, and may well discourage foreign students. Let us not forget that British universities depend hugely on foreign students, who bring in somewhere between £5.3 and £8.5 billion a year in foreign revenue.

Subprime lending

In the Conservative party there are number of ministers and MPs who are seriously concerned about the plight of people caught in the benefits trap at the bottom of society, and the immense challenges to social mobility. They can talk the talk.

But they seem blind to the damage to social mobility that the marketisation of higher education will cause. Universities used to be a major engine of social mobility. But now even students on the maximum grant (issued through means testing, and, unlike a loan, does not have to be paid back) might still expect to leave university with a debt of £30,000. Many students from poorer backgrounds will be put off going to university because they justifiably do not want to take on its financial risks.

You will hear the counterargument that the terms of repaying the loan are generous: that – as cited above – you don’t have to repay anything until you earn more that £21,000, and the loan is written off after 30 years. If this was a proper lending business, you would say that this was enticement to indebtedness – like credit cards offering transfers at 0%. Or like banks offering subprime mortgages to people who are likely to have difficulty in meeting the repayment schedule, and who are likely to default.

But this is a government offering loans to its own citizens, using taxpayers’ money.


Another counterargument is that many universities and colleges of higher education have been offering low-standard degrees, luring in students under the false pretence that such qualifications will be valuable to them. The marketisation of higher education, so the argument goes, will root out these, as fee-paying students will apply their own consumer tests to degrees and expect value for money.

There is no doubt that the new student loan regime is having this effect in this regard. Some 5000 courses have already been slashed from UCAS, and many universities are reviewing their less-marketable departments.

Even the top universities are not immune. The government is still reducing its funding to universities, so the tripling of university fees is not going to cover the shortfall. Universities will be forced to cut their services: so students will actually be paying more and getting less.

But how exactly do you measure the value of a degree? Is it simply in terms of the income you can derive from it in the workplace – the income you need to pay back the loan?

What value is a degree in the arts and humanities? History, music, English literature? Yet you need such degrees to become a teacher or university lecturer, a gallery curator, an editor. The damage to the cultural health of Britain is incalculable: not without reason has the approach behind the White Paper been criticised as “philistine”.

As for the validity of the scheme in terms of the long-term impact on the economy, some have also argued that a cash-strapped, indebted generation of graduates struggling to pay off its loans will be less productive, as they will be unable to afford to invest or innovate.

The Pinch paradox

The strange and bewildering paradox for all those interested in intergenerational issues is that this new universities policy is being led by David Willetts, Minister of State for Universities and Science, and author of one of the best books on the intergenerational perspective, The Pinch – a searing attack on the legacy of the baby boomer generation.

He doesn’t go into much detail about higher education in the book, but we can extrapolate from the drift of his argument. The current generation of baby-boomer politicians themselves enjoyed the legacy of university education that was virtually free, or at least heavily subsidised. Now they want to cut off that benefit from future generations and shift the costs away from the State to the students themselves. But it will in fact be the nation itself that ends up paying anyway, 35 years down the line – having saddled a generation with debt.

From all points of view, this looks a like serious case of intergenerational mugging.

Posted on: 6 January, 2012

5 thoughts on “The Future Funding of Higher Education: another intergenerational mugging

  1. Anar Green

    Many good points raised here. But I must say that we must no longer allow ourselves to be led astray by the promise of higher education. The relationship between a degree and income has ended; what remains is between a degree and debt!
    The fact is that the economy has been systemically gutted of jobs. No, it has been systemically gutted of income! Debt repayment is irrelevant–unless if the discussion is solely focused on indentured slavery.

  2. Observer

    some interesting numbers:

    number of people in uk aged 20-40 years = 7 million

    number of properties owned by private landlords, 4.5 million
    number of private landlords of that 4.5 million not a business but a private individual = 88% (i.e. not the property that they or their family live in)
    number of properties owned but not lived in by the owner or let out = half a million

    number of people attending university in 1970: 600,000
    number of people attending university in 2010: 1.8 million
    (which generation are and have been funding the loans?)

    there are a lot of answers to the question “why?” in those numbers above

    some questions:
    why don’t the local authorities buy the private housing and let it out if there is a shortage and no space to build? It must be cheaper for them to do that in the long run.
    why is affordable housing built with cheaper materials and sold at higher than the local market price to investing private landlords? if the affordable housing is supposed to relieve the housing pressure then the government should impose a sanction on sales to private investors and allow on customers that are to first time buyers or downsizing retirees.
    why are the elderly being looked out to vacate their one home when clearly such a large percentage have more than one home and many not fully occupied?

  3. Jenny

    is this foundation just concerned with the section of the population who have attended university and are looking for a home? There are people of the same generation who have not been able to find work, looking for work, working on a low wage or in work whose needs to be represented. If it is representing a generation on the basis of fairness then surely it should speak for those too. Also those of the same generation who have social, education special needs and health considerations should also be represented to ensure fairness within the generation as well as across generations.

  4. Hazel

    There are nearly 2million university students. Does the country need that many or is it oversubscribed? Some graduates go home to their parents for a couple of years and save as much as their income as possible for the first couple of years working to settle the loan. Why doesnt this foundation invite readers who have settled their loans offer their stories for others to learn from? There are a lot of graduates who have set up a home – why not invited their stories on how they have achieved this?

    Some graduates who then go on to work in the public sector need only work until the age of 50 to get a handsome pension of at least 25K if you listen to the media and at 60 soon to be 65 it is then topped up with the below minimum wage to survive of 5K. By the time a graduate reaches 75 in this set up, as far as investment and return is concerned the country has paid very much over what has been contributed by that person.

    A person who is not a graduate will have worked in excess of 50 years and there are many that have been working beyond state retirement age for many years, at the age of 75 they can look back and know that they have contributed very much more in terms on monies to the state pot that a graduate. Not all people over retirement age have stopped working and are still paying income tax for the work they are doing.

    A person who has not worked all their lives and have been claiming benefits for reasons of being a carer or other. Some people are not born academics and other job opportunities are inshort supply so they would do community voluntary work instead. Their savings to government of providing that care or valuable support is far above the payment out to a graduate. Their total pension from the state is £5k – not enough for a bedsit before food, however, their contribution to the community has been far greater than that of the graduate in terms of investment and returns.

    If a public sector worker can retire at 50 on a salary of £29k, is it fair for them to receive a state pension at 65 when that income is well above the national average. The so call private pension final salaries is 10% of the income earned not 100%.

    Is it fair to propose to charge NI to pensioners who only receive 5K per year and who has contributed over 50 years income tax. They are already below the poverty line? How about if a person is receiving an income above a certain threshold then a state pension is not given at all? This would also include the income from multi property ownership.

    There are some other points of view that qualified economists should consider………at present it is suggesting an oversubscription of university students who then should be entitled to the fruits of the labours of others and with a very short working life in return

  5. Mark Wadsworth

    Broadly agreed. I think that there are too many people studying and that this is not a good way of allocating resources, but the staggering hypocrisy of Willets and his ilk knows no bounds

    Secondly, all these changes to fees and loans which the Tories brought in were not meant to reduce the ‘deficit’ (which the Baby Boomers have run up at everybody else’s expense), it will reduce the £120 billion defiit by maybe £0.4 billion a year or something,

    Thirdly, all these changes were brought in by the Tories to discredit the Lib Dems ahead of the AV referendum, so the Tories were just poisoning two wells with one [can’t think of suitable word]. The students were, so to speak, just collateral damage of the Tories’ war against AV.

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