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The truth about student finance

When student finance comes up in the media, it's usually alarmist. Headlines proclaim between £40,000 and £50,000 of debt on graduation and that “student loans 'will make it harder for graduates to get a mortgage'”.

Initial protest at tuition fee increases was largely predicated on working class students being priced out of education. Now that it's a reality, talk tends to centre on being saddled with debt for life – with nostalgic reminders of when a university education was free.

But with signs pointing to tuition fee increases having little effect on university applications, this can't all be true, can it?

Student loans: a progressive graduate tax

What today's students have cottoned onto is that university doesn't, in fact, need to be paid for up-front; a false impression easily picked up from numerous scare stories about the cost of university.

In fact, the repayment structure effectively makes a student loan a progressive tax on graduates, little different to the kind proposed as an alternative. Repayments only begin once your course has finished and you're earning over £21,000 per annum. At this point, you pay back 9% of anything over the threshold, which equals out at £30 per month on £25,000, £67 at £30,000 and so on.

The up-shot is this: graduates pay back at an extremely favourable (and affordable) rate, in proportion to how much tangible benefit they received from their university education. It's possibly the fairest tax we have.

Targeting tax

Arguably, the student-loan-as-graduate-tax is has also become more targeted since the tuition fee rise. A little discussed aspect of the tuition fee rise was that it hasn't resulted in an overall increase in money going to universities, rather, it's essentially a government accounting trick.

The rise in tuition fees was designed to compensate for a “the almost complete removal of direct government funding through the block grant” - in effect shifting university funding from an up-front cost to the Treasury into a debt instrument. 

The government still shoulders responsibility for lending to students, so by raising tuition fees they are making students – who receive a university education – responsible for repaying the cost, rather than taking it from general taxation – paid by a majority who didn't go to university.

Put in this light, the tuition fee rise seems a reasonable reaction to a funding crisis: as access to university was widened post-Blair, offering the free education enjoyed pre-1990 when the university population was far smaller was clearly unsustainable. And why shouldn't those that enjoy the benefits pay for the cost?

Debt timebomb

The real concern with nominally shifting the burden in this way is that a vast proportion of students will never pay back their student loans. The government's own estimate is between 35% and 40% - an estimate the Public Accounts Committee has labelled “optimistic”.

This makes the likelihood of the kind of junk debt sell-off of the student loan book, such as we've already seen with the sale of £890m of loans for just £160m, that much greater for simple cashflow purposes. Danny Alexander has admitted as much.

There are two problems at work here. Firstly, that shifts at least some of the cost of paying tuition fees back onto the general taxpayer – by selling at below face value, the Treasury is effectively subsidising the deal, making a massive long-term loss for the sake of short-term accounting wins.

Secondly, selling that amount of debt, with such a comparatively low level of interest and repayment rate will require some sort of 'sweetener' such as the already proposed retroactive raising of the interest rate or further taxpayer subsidies. 

Priced out of education?

None of that need concern the individual student, for whom the fact remains – student debt need not worry them nearly as much as the media makes out. It's affordable to repay and it doesn't affect their credit rating. It may affect their ability to get a mortgage but only in reference to the amount of disposable income they have. And with the housing market the way it is, they may not want a mortgage anyway.

The real financial issue facing students is not the debt – it's the day to day expenses. Outside London, an average year at university costs £22,189, with the majority being living costs. But the average student income from loans and grants is £17,450.

The poor student is a well-worn cliché, but a shortfall of £4,739 when you're meant to be studying full-time is quite a gap. It's not funding or even tuition fees that is making university difficult to afford, it's the ever rising cost of living affecting us all: up 25% since the the start of the economic downturn.

So what's the truth about student finance? It's more affordable than it's made out to be, and the funding system is fairer than it first appears. But that doesn't mean you won't struggle when you're there. It's also a public finance disaster waiting to happen. But that needn't worry today's students. Not yet, anyway.

  • Date published: 09th June 2014
  • Written by: Sarah Willis