Osborne plans to abolish the cap on student numbers – but do the finances add up?

David Kingman casts a few doubts on George Osborne’s plan to abolish the overall cap on the number of “home” students at English universitiesgraduation cap  on a pile of money ( student debt )

One of the more eye-catching announcements in the recent 2014 Autumn Statement speech delivered by Chancellor George Osborne on 5 December was that he said the Government intends to lift the overall cap on student numbers studying at English universities from 2015.

Under his plans, the current cap will be expanded by an additional 30,000 places during the next academic year, and then abolished completely thereafter. Osborne claimed that this can be funded through selling off more of the government’s student loan book to a buyer in the private sector, although several commentators have questioned the feasibility of this plan.

So, is this a workable idea? And what impact will it have on public finances?

Lifting the cap

As has been widely commented on, the Coalition Government has already made major reforms to the English higher education system by withdrawing virtually all direct government funding for university teaching and replacing it by allowing universities to charge their students higher fees of up to £9,000 per year for an undergraduate degree.

In theory, if each student is now paying for the full cost of their own place on a university course then it shouldn’t be necessary for there to be an overall cap on numbers. However, in practice most students have to borrow the money they use to pay for their tuition fees from the government through the student loan scheme, on the condition that they will repay it later on during their working lives; therefore, the government has had to impose a cap on the number of students who can take on new student debt each year in order to prevent the student loan scheme from becoming a source of unlimited financial liabilities. Universities which accept too many applicants on to their courses currently face stiff fines for doing so.

During his speech, Osborne claimed that there are currently 60,000 students each year who obtain good enough grades to study at university but are prevented from doing so by an “arbitrary cap” on student numbers. He argued that this holds back the UK’s economy by reducing the number of graduates, while it is also incompatible with the principle outlined in the Robbins Report that higher education should be open to all who are sufficiently qualified by “ability and attainment”. In theory, removing the cap on student numbers ought to improve fairness, boost social mobility and help equip the UK economy to compete in the “global race” against other highly developed countries.

Several bodies which are involved in the UK higher education sector publicly came out to offer their support to this announcement, including Universities UK, whose chief executive Nicola Dandridge gave the following endorsement:

“More graduates is good for the economy, developing a strong society and improving the lives of individuals.” 

Do the numbers add up?

However, several commentators have publicly voiced scepticism about Osborne’s plan, claiming that the numbers simply don’t add up. The official line from the Treasury is that this measure will be financed entirely through selling the pre-2012 student loans which are still on the government’s balance sheet. The language used in the official Autumn Statement Document made this clear:

“The additional outlay of loans over the forecast period will be more than financed by proceeds from the sale of the pre-reform income-contingent student loan book. Taking the two together, public sector net debt by 2018-19 will be lower as a result.”

Some of the strongest criticism has come from the Institute of Fiscal Studies, whose deputy director Carl Emmerson claimed that funding the removal of the cap through selling old student loans was “economically nonsense.” Their main point of criticism is that the loans are an asset which are expected to generate a return over the coming years through the value of the future repayments made by graduates. The income from these repayments has already been accounted for in government revenue projections, so selling the loans off in the present and then re-allocating the money which this raises to fund new student debt will have a negative impact on the public finances over the long run. Paul Johnson, the director of the IFS, expressed this argument in very simple terms:

“Selling the loan book will be broadly fiscally neutral in the long run, bringing in more money now at the expense of less money later on. Lifting the cap on numbers will cost money every year.”

Dr Andrew McGettigan, a higher education funding expert who wrote The Great University Gamble (and is also a member of IF’s advisory board) has also questioned whether there is actually a large enough market in student loan debt for the government to be able to offload enough of the old student loans to the private sector for this strategy to be feasible. It is also worth emphasising that the way Osborne phrased the announcement during his speech made it sound as if this will be a permanent change to English higher education funding, creating an open-ended commitment, when in fact there doesn’t appear to be any official explanation of how the rising costs of abolishing the cap on student numbers will be funded beyond 2018/19. As the IFS said, issuing new student loans adds to the government’s cost burden every year, while the stock of existing loans which can be sold to the private sector will eventually run out even if they do manage to sell as many as they would like to.

Ultimately, it is difficult to know exactly what to make of the Chancellor’s announcement. While abolishing the cap on student numbers will be a good thing if it enables more students who currently miss out to attend university, higher education institutions need to be placed on a stable financial footing, and students deserve to know that they won’t one day be hit by tougher repayment conditions which the government might have to impose if it wants to attract private sector buyers. Until Osborne can explain exactly how he intends to fund an uncapped expansion of the higher education sector in a way which will be sustainable for the long term, it seems fair to take his plan with a pinch of salt.

Posted on: 22 December, 2013