Student debt seems to be on the political agenda.
The Tories are scared witless that Labour's plan to abolish fees won over the young in the June election.
Michael Gove and Vince Cable, however, seem to think that those who do not go to university must not subsidise those who do.
But no one seems to be talking about what to do with the existing debt.
Let's be cool and calm then. First, let's recognise that universities can exist in the private sector, just as schools can. The result tends to be the same in each case though: only an elite get to take advantage, and we know that imposes an enormous opportunity cost on society in the form of wasted talent. As a result we have state backed universities.
Second, let's recognise that the trouble that we face is that we have been pretending otherwise. We have for rather too long now pretended that an increasing part of the cost of those universities is paid for by the students in the form of debts that they owe. But actually, this has not been true. Only a relatively small part of all student debt created has been repaid or sold (I admit I do not have the precise figure to hand: it does not change my argument). As a result what has really happened is that the government has continued to fund universities. It has just pretended to do so through a balance sheet account called the student loan account. This has been its alternative to recognising the spend in question as a cost. But that's just an accounting game until the student is asked to pay or the debt is sold because the reality is that it is has actually stumped up the cash at the time a student is studying in a significant proportion of cases, just as it would have done if the cost was being incurred by the state. And as we know, doing so has not brought the economy to its knees so as a matter of fact we could afford it. In summary, the fact that it was recorded that government borrowing was incurred to fund a growing student debt pile rather than to record the expense directly makes no difference: we have to date borrowed year in year out to actually pay for our universities.
In that case, thirdly, let's recognise that this means the debt does not have anything to do with education per se: it's just been a convenient way of dropping part of government debt onto a particular group in society who may pay 10% extra tax for much of their lives as a result and be denied the chance to afford a house, raise a family or save as a consequence. This is financial engineering in that case. It is not about being a student. And if in doubt think about it like this. Instead of making students bear part of the national debt suppose we made other people do so instead. So, if you went to hospital you'd have to pay more of the national debt as a result. Or if you had a fire you'd pick up a slug of debt. And what about if you didn't have children? You'd get a national debt refund for not burdening the state in the Gove / Cable personal costing formula . All these are analogous to what's been happening with student debt, and as absurd.
We should pick those who go to university because they have the ability to attend and will benefit society by doing so. I know that the current system does not produce outcomes without bias, but maybe that's at least partly because of the debt. And we also know now that fire is not always a random chance either. And nor is ill health. But we realise we should spread the risk of these last two, at least in principle. So why not also spread the risk of being able to benefit from university? We all gain as a result. Instead Cable and Gove seem to have utterly forgotten the role of government in pooling risk and benefit as a result. Let me be clear, having higher rates of tax for all on higher incomes to tackle potentially resulting inequalities is absolutely fine: I welcome those. But what I don't see is why we should privatise the national debt to a portion of society.
So what should we do?
First scrap fees.
Second, scrap the student debt now owing and use QE to buy back that already sold to third parties.
As a result make a level playing field. And give people a chance in life.
As importantly, boost the economy by reducing the crushing burden of debt that hangs over so many younger people now before they might ever think about going near a mortgage. If this debt is taken off them they may spend more. But as importantly they might have a chance to live.
And then a lot of politicians need to say sorry. Because student debt was never about paying for university at all. Student debt was about dumping national debt off the balance sheet and onto the young. whilst extracting a profit for the financial services sector on the way. It was always a scandal in the making. It;'s time the scandal was brought to a close.
It's time too that Cable and Gove worked out the reason for government. But maybe that's too much to hope for.
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One of the worst things Labour did was tuition fees.
Absolutely. I recall NUS at the time when loans were first introduced for maintainance arguing for a graduate tax which was kicked into the long grass after a review. The cost of student loans in terms of the systems for administering them are enormous (remember the banks refused to do it, fearing a boycott by students that had so badly hit Barclays’s over apartheid in SA) However, it broke this idea of state investment and developed, step by step, a market driven culture which has got us to the point where some universities are so desperate to get students (fees!) that they will offer places to students regardless of whether they get any level 3 quals, or not!
I very much doubt the last
Beware of the hidden agenda of class warfare, and the closely-related agenda of populists who would exploit resentment between the the uneducated and the educated.
They do not admit their motivations: but they will never be persuaded by economic arguments, nor can they be refuted or defeated by them.
I agree.
I notice that German States have abolished tuition fees.
(Germany iss a more successful country than we are!)
We are in the silly situation where old debt (much of it notional) is carried on for many years – and much of it never repaid.
We should hold on to the concept that University education benefits not only the students but society as a whole.
Germany notably has a very different banking system, one where there aren’t simply a small handful of major players who remain effectively immune from shut-down; “too big to fail, too big to jail”, and a whole host of smaller community-owned and oriented banks. Here we have the opposite. The banking system there is nurturing whereas ours is largely parasitic.
I watched Gove on Marr’s show last night.
Gove said that it was wrong for tax payers who would never get the chance to go to Uni to pay for those that did. And that (wait for it) such students should ‘give something back’ when they qualified (but he did not mention the interest payments).
For someone from a party that believes in trickle down – there seemed to be no link with the fact that the guy who went to Uni could actually create jobs for those who don’t.
He said this all in the reasonable chatting class like tone Gove would use if he was explaining the need for say – concentration camps for single women who did not pay their TV license. Oh it all sounded so reasonable and well thought out and natural.
As for Cable he is just a typical classical liberal – too liberal to make policy in order to make anything happen and too liberal to believe in any method about anything. Being liberal these days is about nothing but sentiment. When it comes to active policy you can forget it because to make or ask people to do something is well – illiberal isn’t it?.
Why do we give air time to these idiots?
May I also echo Bishop Peter Selby (author of Grace and Mortgage), at an AGM for the Christian Council for Monetary Justice (http://www.ccmj.org/) some years ago, that the introduction of student debt was also a clear example of social control, designed to keep students’ noses firmly pressed to the grindstone of debt, preventing them from engaging politically, as they had in the 1960’s
Well, that certainly worked brilliantly for the establishment this time round eh? Not! Tripling fees to £9k was a classic overload of the camel, who duly kicked back. And who can blame the students for doing so?
May I pick up on what Paul, Nile and David say above, re the iniquity of the tuition fees scam, the classic “divide and rule” tactic of setting uneducated against the educated, and the failure to “cost” both sides of the equation, by looking only at the “cost” of education, and not at all at the benefits of graduates to society.
The argument that “the poor should not be subsidising the rich” advanced in favour of student loans – which I heard directly expressed by its author under New Labour, Lord Adonis, at a meeting of the NEC of the Christian Socialist Movement that I attended in around 1998 – always struck me as bogus, even (especially??) when advanced by Adonis as being some sort of measure of social justice and fairness!
It’s import was always not only the accounting sleight of hand Richard refers to – a sort of educational PFI – but also assuredly the social control referred to by Bishop Peter Selby.
In that light, Richard’s call for can apology from politicians seems entirely justified.
Peter (a really good man who I have had the pleasure of meeting several times) was right
Agree with everything you say.
However, I think the most crushing argument against student debt is this:
The student loan of up to £50k is virtually impossible to repay by following the repayment schedule, mainly due to interest (currently 6.1%) going up quicker than planned repayment schedules reduce it.
Only after earning £56k or more will student loans reduce.
When
(a) graduates average starting salaries being between £19k and £30k (depending on size of employer) and
(b) even salaries after 5 years for the top universities (average around £45k) unable to repay student loans
then this “student loan system” is nothing like a loan system but some expanding pyramid scheme.
It is shocking that unless students earn about £56k the student loans will go up over time, rather than down.
That means that graduates have to earn twice the UK average salary of £27k to reduce the loan. Yet, graduate salaries on average are only £12k higher than non-graduates.
So the student loan system is nothing like a loan system. But some pyramid scheme which is virtually guaranteed to make the average graduates worse off. And get the majority of graduates, other than the highest earners, into more and more debt. (Until loans are written off after 30 years.)
This pyramid scheme, where loans outstanding go up rather down, does not even reduce government borrowing, given that the government will eventually have to write off huge amounts. Which have mainly increased through usurious interest rates.
It is a completely bonkers system, and the sooner it is scrapped the better.
You are right
Mr Ponzi would love it
It has to go
Absolutely spot on!
And this is exactly what has been happening in America for years.
Michael Hudson also calls this sort of debt a ‘chain letter’ Ponzi scheme in his book ‘Killing the Host’ that I am currently reading.
The answer to the whole charade is on page 67 of this book in point 12 (in answer to how debt kills markets by strangling demand because of less money to spend by the debtor):
“Cancelling debts was politically easiest when Governments or public institutions (temples, palaces or civic authorities) were the major creditors, because they were cancelling debts owed to themselves. This is an argument for why governments should be the suppliers of money and credit as a public utility.”
So in my view the Government could pay tuition fees and then print the money to pay off the debt every year ( I would not call it debt – I would call investment). The return might be a healthier economy with less debt.
Chapter 4 of this book also has a section on compound interest (‘the Rule of 72’) which also adds to the student debt problem.
Agreed with all that.
On educational inequality I think there is a case to offer everyone a particular number of years of education and skills training, so even if you did not go to university you could benefit from other training, either now or later.
The world is becoming more complex, knowledge and skills is our competitive advantage. But the right want to create a scarcity in education such that only they benefit.
I think that point critical
And the idea that this is when young is now absurd
In the world of government bursaries. Would bonding not work?
At present, I could recieve £25,000 tax-free for doing a shortage PGCE course then bog off, without ever teaching. There are other courses that bursaries also attach.
Is this a form of QE Lite?
And one has to ask why is there a shortage and Richard you’ve gone on at length on why this is along with solutions.
Why bond? The PGCE may not teach. So what? Does that mean they won’t be of value?
And bonded teaches woukd be dire in the classroom
Seems like there’s already a burgeoning problem for the UK – http://www.cityam.com/267697/skills-shortages-costing-uk-businesses-2bn-year. Whatever happened to “education, education, education”?
The Right-wing ‘scarcity’ strategy applies not only to education but also to money in general. It’s a corner-stone of their ideology.
But then business is not willing to deliver skills training – which is another part of the ‘British’ problem
I think there is empirical evidence that the right doesn’t benefit from education. Unless it’s rote learning it passes them by.
Joking apart (just) is there a reason to limit it – can you have too much education?
As there is always more to learn how is that possible?
It seems to me that the whole student debt system is simply a way to extract ‘rent’ in the form of interest on the loans made – just like any loans. The object of such a system is not the eventual repayment (that is irrelevant) but the continued payment of interest, which as student loans are increasingly sold to third parties, represent a lucrative income stream. I always find it most annoying that those advocating for loans are those who have already benefited from free tertiary education – or are from wealthy enough backgrounds that loans would not be have been necessary.
My son has just graduated and received a statement from the SLC.
The principle borrowed is £38,000.
The total owed, with interest, is £42,000.
It’s been three years and nine months since he first started uni, and he is yet to do a day’s full time employment in anything other than a vacation job.
Yet he now owes £4,000 in interest alone, which will increase probably faster than he can pay it off.
It’s an appalling way to treat our children; if the government says its worried about ‘passing on the debt’ to our children, then WTF do they think they’re doing with high-interest Student Loans?
I’ve tweeted on that….
Great blog. Needs shouting from the rooftops.
Thank you
“And then a lot of politicians need to say sorry. Because student debt was never about paying for university at all. Student debt was about dumping national debt off the balance sheet and onto the young. whilst extracting a profit for the financial services sector on the way.” — Well put.
I like your reasoning and absolutely agree that university should be free. What i could never understand about the argument that graduates should pay because they’ll earn more is why all of us existing graduates who got it for free don’t also have to pay.
I am reading Ha-Joon Chang’s critical books on unfetterd free-market capatalistic economics. His analysis shows little correlation between higher education and productivity and economic growth. Perhaps government investment might be better spent on secondary education and the encouragement of apprenticeships. (My own “Degree Level” qualifications came through Technical College.) Most people do not use what they learnt in higher education in their jobs, perhaps specifically with Arts degrees. There can be inflation effects with too many graduateships – employers may then look for Masters degrees and PhDs when selecting employees. I am NOT saying there is no social benefit from higher education – no flames please! Are not means-tested grants a better way of helping determined youngsters from disadvantaged backgrounds ( encouraged by good secondary school teachers)?
We need to provide an equivalent level 4 education to all who want it – and not just at university
I entirely agree
Think of student debt along these lines:
-Scenario 1 Student debt £20,000, your earnings £31,000. As you repay 9% of everything above £21,000 your annual repayment is £900
-Scenario 2: Student debt £50,000. Your earnings £31,000. As you repay 9% of everything above £21,000 your annual repayment is £900
-Scenario 3: Student debt £1 Billion. Your earnings £31,000. As you repay 9 of everything above £21,000 your annual repayment is £900
Thanks to Martin Lewis for pointing this out.
The so-called debt written off after 30 years so really its a contribution”Tax” and ony the really high earners will ever pay it off.