The issue of student debt and the sustainability of our university system is bigger than ever. Responding to record levels of student and taxpayer dissatisfaction, UK2020’s latest report, Defusing the Debt Timebomb: A Fair Deal for Students and the Taxpayer, published today, proposes significant changes to the way student loans work that would bring down costs for graduates while reducing losses for the taxpayer.
With total student debt currently projected to reach £1 trillion in just over 20 years, we are threatened with our own self-inflicted “subprime” crisis.
Estimates show up to 50 per cent of this debt will eventually be written off as less than 25 per cent of students projected will pay off their loans in full. Most graduates are unable to service even the 6.1 per cent interest on their £50,000 debt, let alone start repaying capital.
We cannot continue to ignore this problem; bold action is needed.
This report recommends removing all past and future student loan interest. This is the equivalent to removing a millstone of up to £6,500 of debt from the poorest students, more than 10 per cent of all debt.
This would not damage the public finances: the total face value of the interest is £11bn, of the £89bn total student debt, which is held in the government’s balance sheets at £61bn as it has already made some provisions for future losses, without affecting its accounts.
The government is currently paying the gilt interest on this debt annually, but capitalising the student loan interest in the knowledge it will have to be written off in the future.
It is not only students who would benefit; taxpayers’ interests are also defended. Extending the current 30-year debt write-off guarantee until retirement age would increase debt recovery rates to an estimated 80 per cent plus. This makes sense since the current repayment system stops at or before many people’s highest earning capacity.
Taxpayers and students would gain in the long run as the initial debt would be lower than it is now and would be eroded by inflation over the longer repayment schedule.
Universities currently have no “skin in the game”, by way of financial accountability for the quality of the courses they run. They should either pay the future interest on loans for students, or they should be responsible for a share of future losses. This would make them perform more effectively.
A critical element of this report is an innovative new way to fund student loans, the National Student Bond (NSB). The bond would be issued by a revamped Student Loan Company, backed by an appropriate government guarantee and offered to major long-term investors such as UK pension funds.
This 30-40 year bond would have a coupon 0.5 to one per cent above the gilt rate, but would not be tradeable like gilts. The higher coupon would mean it is valued more highly, thus reducing pension fund actuarial deficits. This would in turn reduce catch-up contributions from employers, freeing up capital to invest in the economy.
The nation’s biggest pension fund deficit is ironically the universities’ own scheme, USS, with a £17bn deficit. It should be the biggest buyer of this National Student Bond (NSB), enabling universities to reduce their catch-up contributions.
This NSB would significantly reduce future funding by taxpayers and relieve the pressure on government borrowing, potentially leading to student funding being taken off the government’s balance sheet altogether.
This latest report follows our release in early September of Timebomb: How the University Cartel is Failing Britain’s Students. The issues highlighted in September’s report – value for money and the importance of two-year courses to broadening choice – have attracted close attention from the government as it seeks solutions to provide a fairer deal for dissatisfied students.
I am grateful for the support of former Labour and Conservative cabinet ministers Lord Adonis and Owen Paterson, who have given cross-party encouragement and support for this report.
As the government looks for ways to offer substantially more hope and opportunity for students, we believe this report contains credible, innovative solutions, and have submitted it to the review of student finances recently announced by the Prime Minister.
Only by taking bold decisions now can we safeguard the interests of both the students of today and the taxpayers of tomorrow.
Richard Tice is principal author of Defusing the Debt Timebomb, and a property entrepreneur.