Can the next government afford an increase in student or university funding?

You might assume that nobody’s really going to want to talk about student finance during the election.

The Lib Dems won’t want anyone reminded of their “betrayal” in 2010, the system we’re stuck with England pretty much belongs to the Conservatives, and Labour says it has (or at least will have) no money.

Labour might have no choice, of course. But in a way, if you’re trying to remind voters about the economic mess the country’s in and to both pin some blame and temper expectations, it’s not unhelpful to say you’ll prioritise other things.

Add in the fact that whenever Keir Starmer is asked about a Corbyn-era pledge that he seems to relish in signalling his abandonment in order to demonstrate that the party has changed, and you get what we’ve got so far.

Do you believe in life after love

Hence on Friday morning in her big interview with Keir Starmer on the Today programme, Mishal Husain ran with a “what do you believe in” line to questions to ask if Starmer still believes in free fees:

Well, I certainly believe that we’ve got to change the current arrangements because I don’t think they’re fair. But obviously abolishing tuition fees is only one way of achieving that.… [since 2020] then there’s been huge damage to the economy and as we’ve got towards the election, we’ve had to make difficult choices.

…Looking at the costing for tuition fees and abolishing them, looking at the money we need to put into the NHS, I have taken the decision we can’t do both. Now that’s a difficult decision, I’ll accept that some people will say you’re going back on one, but not the other, but we can’t have both – and I’ve decided that we have got to prioritise getting those waiting lists down in the NHS because we have got to get our economy going.

So how might the current arrangements become fairer? The night before on Question Time, Shadow Education Secretary Bridget Phillipson had a go at framing the problem to which they have worked up a draft answer:

Our young people, when they leave university, now have a system which, as of September just gone, is even more regressive than it once was – so a nurse ends up paying more, while someone who earns a big salary working in the city pays less.

That answer, broadly, looks to be a version of the London Economics modelling that’s been doing the rounds – if you do a version of cancelling the switch to RPI from RPI+3% that this government has imposed on the 2023 cohort, in the modelling you can afford to reduce repayments for new(er) graduates and deliver a symbolic grant by returning to soaking the rich.

Presenter Fiona Bruce cut her off at that point – demanding detail. Phillipson muttered something about how hard it is to grapple with the detail from opposition, pointed a baffled audience to “the modelling that’s around”, committed to “a more progressive system without any more spending or borrowing” and said something about spillouts.

Then asked if she would raise fees, she refused to rule it out (despite one sentence previously refusing to contemplate increased borrowing), but did say that “students across the country” tell her that increasingly they can’t manage the cost of living:

I want to make sure that young people from less well off backgrounds have the support that they need to go to university if that is what they want.

What’s that you say? Starmer still believes (long term) in abolishing fees but Phillipson might put them up? In the crayons-politics of a general election, it’s the sort of position that generates headlines like this.

Lines to take

It may well be, then, that these are pretty much the only lines we’re going to get from Labour during the campaign – summed up as:

• We can assume there will be a commitment to making repayments fairer in the manifesto
• We can assume that there will be a commitment to bringing back the maintenance grant in there as well, although perhaps not with any numbers attached
• We can assume Labour will try to avoid the question of university budgets as best as possible, despite the prospect of collapse appearing on Sue Grey’s “Shit List”.

The what now? If you’ve not been following, as discussed on the Wonkhe Show this week, Labour Party figures have already spent weeks getting ready for power.

This partly takes the form of formal talks with the civil service – where in the period before an election is due, the opposition party leader, shadow cabinet ministers and other party figures meet with senior Whitehall officials to discuss the potential transition to government, regardless of their chances of winning.

These kicked off in January, and were understood to be into their second round when Sunak made his surprise election announcement.

Now that Sue Grey has switched from poacher to gamekeeper (or is it the other way around), you’d expect said talks to be quite robust – and the press this week has been muttering about “Sue’s shit list”.

Revealed by a Labour official quoted in the Financial Times, it sets out crises which could derail Starmer in the first few months – including the collapse of Thames Water (where a decent chunk of the SUSS pension scheme is invested), prisons running out of space, public sector pay negotiations getting tricky, local councils falling over, a(nother) NHS funding shortfall, and crucially – “universities going under”.

And to that end, we might assume that contingency planning by the civil service is more likely to generate a reheat of the Covid-era HE restructuring regime than it is to an actual increase in the unit of resource any time soon.

The actual options

So beyond the odd bailout, what are the actual options and the fiscal implications? London Economics has published several versions of its modelling for several clients over the past couple of years, but for illustration ease here I’m playing with the Institute for Fiscal Studies (IFS) calculator – that allowes you to design your own student finance system and see the implications.

If we take the 2021 UG England fee system, students were set to have borrowed £43k on average by the time they graduated – and were set to pay back £30.9k on average. That in theory involved the SLC loaning out £20.6bn and getting £13.4bn back.

That’s because there’s two subsidies in the system. One is that students don’t start to pay back until they’re earning over a threshold, and the other is that the debt was set to be wiped after 30 years.

They were design features – not bugs. It might feel miserable to have a growing “debt burden” on the Student Loan Company annual statement, but the whole idea was the cost of HE was shared between students and the state.

It’s just that in lifetime earnings deciles 7-10, they were going to pay more back via that interest rate – while everyone else got to pay less, via the threshold and write off.

Then for 2022 and 2023 then universities minister Michelle Donelan, under orders from then Chancellor Rishi Sunak, reduced the subsidies – by lowering the repayment threshold for 2023 entrants and freezing it for everyone else, and by extending the repayment period to 40 years for new graduates.

To give you a sense of the benefits (and therefore cost to graduates) of those two measures, extending to 40 years was worth about £2.6bn per cohort in extra money back to HMT, and the interest rate changes just over £2.1bn per cohort.

But to offset that, the Conservatives noticed that it’s the interest rate that makes the system look upsetting – so for 2023, combined the above with a shift from RPI+3% to RPI, allowing them the line “we’re reducing student debt and the rate at which it grows” if they need it.

That cost HMT (and so benefitted principally richer graduates, who will “pay off” lower debt earlier than others) about £2.5bn per cohort.

Net all that off and combine the implications, and IFS reckons HMT is saving £3bn a cohort in the long-run in real terms. So when Phillipson and Starmer say that they want to make repayments more progressive within the current envelope, they will likely want to kill off that expensive cut in interest rates for the rich, and spend it on the poor(er) via lower earlier repayments and a token grant – while likely keeping the 40 year-term that nobody’s noticed.

(A tokenistic maintenance grant, b y the way, costs almost nothing – because those with families on low incomes tend to have worse salary outcomes, and so are the least likely to pay back in full anyway. So a smallish grant is like a debt-write off now instead of later).

To do something more substantial – like actually substantially increasing maintenance loans, or increasing money into universities via fees or grants, would involve more borrowing – and for the time being it sounds like Shadow Chancellor Rachel Reeves has ruled that out, regardless of whether repayment terms could be further tweaked to get the long-run cost into the same envelope.

Which all implies that everything’s rather stuck – but there is something else that could unstick it.

Student discounts

Back when fees were £3k a year, almost everyone was predicted to pay back in full, so there wasn’t much need to guess how much of that they would pay back in balance sheet terms. But when £9,000 fees were being loaned out, the Treasury carried on not bothering to do a guess – which would have meant that the loans on the balance sheet would suddenly have been subject to a big write-off 30 years later.

That allowed George Osbourne to hand out loans like sweeties – or “remove the cap on student numbers and swap grants for bigger maintenance loans”, as it’s more commonly known – without hitting his deficit target.

That practice was eventually caught out – and now, the Treasury and the Department for Education (DfE) have to guess how much of each loan will eventually be paid back. And it also has to guess how much that money will be worth for the full (now 40) years.

That means that the “envelope” that Phillipson, Starmer and Reeves are theoretically holding themselves to is subject to all sorts of little variables – ones that can go on to have a huge impact.

Let’s take the IFS numbers – a cohort costing £20.6bn a year in loan outlay, and a £2.7bn long-run cost. IFS makes that a “RAB Charge” of 13 per cent. If nothing else, and notwithstanding the £1.5bn in teaching funding, that doesn’t feel like a very fair split between the state and student to me – but we are where we are.

It means that on IFS numbers, the envelope size per cohort is £2.7bn in loan subsidy, and £1.5bn in teaching grant.

What’s fascinating is the way in which the subsidy guess is calculated. Before you do anything, you have to estimate how much graduates will earn in different subject areas, and at different stages of their career. DfE doesn’t reveal its detailed workings – but it obviously involves a hell of a lot of guesswork.

Then there’s the performance of the economy. On 2022 cohort loans, if RPI inflation falls by just 1 percentage cent, that takes 14 percentage points off the subsidy charge for full-time students, and adds 15 percentage points to it inflation goes up by 1 percentage point – because inflation impacts how much HMT would make out of the interest on loans.

Meanwhile if earnings growth falls by just 1 percentage point, that adds 16 percentage points to the overall charge – because grads were to be paying less back ahead of write off. A 1 per cent increase in earnings growth was going to take 15 percentage points off it.

But this isn’t just about guessing how much grads will earn and pay. Also in the mix is the so-called “discount rate”. Because loan repayments that the government gets in the future are worth less than the value of the loans issued by the government today, HMT attempts to work out that aspect of the cost of government borrowing by applying a rate at which it reduces the value of repayments due to come in – there’s one rate that applies until the end of financial year 2029-30, and another from financial year 2030-31.

That’s also been all over the place in recent years – and can make that magic envelope suddenly much smaller or bigger.

It’s a preposterous mess – where tiny butterfly wing flaps can make the overall envelope look much bigger or smaller than the year before, and where they will end up. And if you’re thinking “well how do other countries do it then”, I’m afraid the answer is – nobody else has slept-walked into a system this stupid.

If you have a regulated loan system of this sort, the only way to stabilise the size of the envelope is loan less money out. But right now, HMT assumes that it will get so much back that switching loan for grant (on the teaching or the maintenance side) that that looks very expensive. And so on.

So what next?

If we look properly into the future, if it wins, the “inheritance” that a Labour government will be left with will be one where the previous government has got away with reducing the subsidy it puts into HE substantially.

But it also inherits wild complexity and this terrible guessing game – and so if Labour wants a more stable-sized envelope, and more control over where graduates are and what they study (ie some level of de-marketisation), it’s going to have to find the money, change the rules or guess that the economy is about to do much better.

And notwithstanding how the OBR and statistical regulators may view things, that really means that Reeves has to make an interpretive call on the “graduate underemployment” problem. If she thinks it’s because the economy isn’t delivering the opportunities that graduates need, there will be space to breathe on more loans and more grants. If she thinks there’s too many graduates chasing too many graduate jobs, we’re stuck – with choking funding per student, or fewer students.

In the more immediate future, inflation has recently been higher than historical standards and earnings growth lower – with much more dramatic spikes and dips than we’ve seen in the past. So the size of the envelope by July 5th is anyone’s guess – because it’s partly related to economic chaos, and partly related to the precise month at which each of the two measures were dip-sticked.

Official statistics that will tell us the government’s latest guesses on forecasts of student borrower numbers, student loan expenditure and student loan repayments in England are due out on 27 June. They may well determine how many redundancies are still to come in universities, and the number of students now depending on food banks, in the next few years.