Higher education is an investment, not a revenue stream

Look to Canada. IF researcher, Sylvan Lutz, argues that England is hurting its economic and social potential by treating students as a revenue source and not as an investment in the country’s future.


Students and trainees are the future not government revenue sources

Young people across the UK are emerging from a decade of slow economic growth, skyrocketing house prices and rising costs of higher education, into a new decade marked by a global pandemic and the highest levels of inflation seen since the 1980s. The convergence of high education costs and high-interest rates is having a particularly outsize impact on students and those pursuing higher technical training – who have long been treated as revenue sources in England – and as a result, is reducing future economic potential. The government’s recent announcement to set the interest rate on student loans at 6.9% – despite the fact that they are advertised as low-interest loans – shows that the government remains intent on the further financialisation of the student loan system.

In the face of major social and economic transitions including automation and the net zero transition, “economies with the highest levels of training and retraining capacity are faring the best.” It is time to stop treating students as financial assets and to start proactively investing in the future of England. While a transition to the fully funded model for domestic students seen in Scotland and the Nordic countries would be slow and costly, the UK government can learn from student loan systems in Canada to reduce the pressures on young people and improve the dynamism of the UK economy.

Education is increasingly a lifelong financial burden for young people in England

Previous generations in the UK did not face the same financial cost of pursuing higher education. In the 1960s the (mostly) free post-secondary education model – now seen in Scotland, Germany, and the Nordic countries – was compulsory in England. After the Education Act of 1962 not only were tuition fees covered but all students attending full-time university received maintenance grants to help with the cost of living. It was not until the end of the Thatcher era in 1989 that student loans were even introduced. A decade later in 1998/99 the New Labour government introduced tuition fees at £1,000/year which triggered a spike in the use of student loans. While the Scottish government took steps to reduce and ultimately eliminate tuition fees, the English government tripled fees in 2004 (to £3,000) and 2012 (to £9,000). Average and total student debt has been increasing ever since.

The current state of student loans in England

The UK is the only country in the OECD that funds less than 30% of its higher education costs through government expenditure. Unlike the Nordic countries (whose governments fund 88-95% of the costs of higher education) and Canada (>50%) the UK is passing these costs on to younger generations.

About 1.5 million students receive a total of £20 billion in loans each year in England. As of 2022 the outstanding loan balance was £182 billion and is projected to more than double in real terms by the 2040s. Students starting their undergraduate degree with loans this Autumn are expected to leave their educations with an average of £43,400 in debt.

The student loan repayment scheme acts as an effective tax for undergraduates/higher technical trainees once their incomes pass £27,295 and £21,000 for post-graduates; these students pay an additional tax of 9% and 6% respectively on their earned income above those baselines. Compare this to how we treat retirees who receive a 12% tax exemption because they are no longer charged national insurance. These higher effective tax rates for those attending post-secondary/technical education are likely to deter poorer young people away from these programmes when we need to be encouraging them.

To make matters worse for students, the debt accrues interest from the moment they start studying. This means that the principal loan continues to grow before they have a chance to start paying it off; this also means that students are likely to want to leave education as soon as possible.

These extraordinarily high debt levels are not widespread across peer countries. The OECD found that UK students graduate with substantially higher debt than any other country analysed. The loans are so over-burdensome that government projections showed only around 20% of full-time undergraduates starting in 2021/22 would ever repay them in full; after some minor reforms, this has risen to a still shockingly low 55% of new students in 2023/24.

Learning from Canada

The Canadian system boasts the highest share of its population with college or university credentials in the G7. This leaves the economy better prepared for an everchanging 21st century. In Canada, the student loan system is better designed in order to make it easier for students to get retrained or educated, rather than saddle students with lifelong debt.

England and Canada both charge their undergraduate students similar rates for higher education, but the publicly available funding is distributed in very different ways. One difference between the Canadian and English systems is how the government accepts the cost of student loans. In the UK,  former students suffer under up to 30 years of extra taxation after which the loan is written off. The Canadian government accepts that cost upfront by offering interest-free loans to all students and means-tested grants for low-income students. Students choosing priority training programmes receive grants, as do the unemployed who are retraining. Canada creates incentives, rather than disincentives, for a well-educated workforce.

In the last year in which statistics were available (2015) the average Canadian student with a loan left their undergraduate degree owing less than half of what their English contemporaries owed (about £17,000[1]). In Quebec, the province with the most generous means-tested grant system, the average student owed less than a quarter of their English counterparts (about £8,500[2]) when they graduated.

Using the right incentives to support students and the economy

In Canada, the student loan system provides a counter-cyclical smoothing to economic and inflationary shocks. Standard economic theory states that an overheated job market creates inflationary pressure, which then leads to rising prices, and rising prices lead to increased wage demands from workers (as we are seeing now in the UK). In a moment like this, a positive solution from a societal standpoint is for workers in low-productivity jobs to go back into education.

But, in the English system, students face the disincentive of high tuition, increasing prices throughout the academic year, and a loan that is growing with interest. In Canada, the temporary interest-free loan (which constantly reduces in value compared to future earnings) creates a much stronger incentive for those seeing inflationary pressure and labour market risk to leave the job market (which can reduce inflationary pressures) and participate in the continuous and dynamic reinvention of the economy.

Preparing the workforce for the 21st-century economy

While the UK struggles with the rising cost of living and a stagnating economy, the government must take steps to reduce the barriers to education and retraining. As a first step, by cutting interest from loans while students are in full-time education/training and increasing the use of means-tested and programme-specific grants in England, the UK government can reduce the intergenerational unfairness of the additional tax burden on recent graduates, increase the dynamic efficiency of the economy and not break the bank in the process. Ultimately investing in higher education by reducing tuition fees and supporting students at the level of our main competitors will be essential to ensuring that the UK will have the skilled workers and innovators to be competitive in the economy of tomorrow.

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[1] Once converted into pounds and adjusted to 2022 pounds for comparison with the English figures

[2] Once converted into pounds and adjusted to 2022 pounds for comparison with the English figures