Tuesday, 12 June 2018

They Don't Know When They Are Onto A Good Thing

A parliamentary committee has got its knickers in a twist, believing that the tuition fee system for England's universities is ripping off students and giving taxpayers poor value for money. The reality is, the system is not ripping off students - the size of the debt the committee is balking at is to do with there being far too many students, doing degrees not worth their price to the taxpayer.

Currently around 45% of student loans end up being written off, so if the article is right in saying that in the next 25 years the debt is going to rise to £1 trillion, then at this rate the cost to the taxpayer will be in the region of £450 billion of unpaid debt (this will be offset by tax revenue from post-graduate earnings, but that would still come into the treasury in tax revenue if prices of degrees better matched their value to society).

The report calls for "immediate reforms" - such as “cutting interest rates on repayments”. This is a foolish idea: interest rates constitute the price of borrowing, and should not be cut, because money loaned now will not be worth as much in the future, so the interest reflects the cost of the loan to the lender. If you’d lent me £50 in 1989, and I insisted on paying it back in 2019 - it doesn’t take much imagination to work out who comes out best on the deal.

The student loan system isn't a terrible system if and when graduates pay it back through their high earnings. The system is geared towards bridging the disparity between your peak earnings, your peak equity and your peak debt, because the majority of your biggest expenses come in your first two decades of your adult life, and the majority of your equity and highest earnings come in the last two decades of your working life.

Consequently, cries that the system is unfair to students are really quite laughable - unless you have a very odd interpretation of the word 'fairness'. A post-graduate student who goes on to earn £24,000 a year will pay back just £42 per month. Earn £27,000 a year and he'll pay back just £65 a month. Earn £30,000 a year and the repayment is a meagre £87 - hardly unreasonable sums.

The main thing that muddies the waters in this system is when too many students are doing degrees. And it isn't surprising to find in a study that when prices of degrees are more in line with what they cost to obtain, the motivations to find higher paid work are more apparent - which is exactly what we'd hope to find.

Further reading - if you would like a more detailed treatment on this, I once put it all down in a blog here: