Ed Miliband’s tuition fee cap proposal is wrong in principle and wrong in detail

Political leaders often struggle to find their ‘big idea’, their multi-purpose answer to tackle a range of problems at once. Ed Miliband does not have that problem; he surely has found his ‘big idea’: price controls. Virtually all economists of virtually all persuasions agree that price controls are a terrible idea, but the Labour leader just loves them.

Energy prices are too high? Cap them! Train fares are too high? Cap them! Rents are too high? Cap them! One wonders why Miliband does not simply propose to cap the price of everything, because according to his logic, that should make all of us rich.

Now Miliband has discovered the problem of student debt and student loan non-repayments, and no prizes for guessing how he intends to resolve it: a £6,000 annual cap on tuition fees.

To be sure, the problem of high student debt levels is real, especially for the many graduates – almost half of them – who work in non-graduate jobs. These people experience, in a sense, the worst of both worlds: they have incurred the cost of university education, but not necessarily its benefits, i.e. they are not earning the corresponding graduate premium that would enable them to repay that debt. Yet these people would not benefit in the slightest from Miliband’s fee cap.

Let’s do a back-of-the-envelope calculation, assuming a simple world without inflation, interest rates, or wage/career progression. A hypothetical student, Jill, has just completed a three-year course in media studies, and now owes the Student Loans Company £27,000. Her hope was that the degree would enable her to earn the London median salary of £34,200 per year.

It now turns out that this assessment was overoptimistic: the best-paid job she can attain pays £27,000 per year. So Jill repays 9 per cent of the difference between her salary and the student loan repayment threshold of £21,000, or £540, for a duration of 30 years, which is the period after which any outstanding student debt is written off.  Her cumulative repayments add up to just over £16,000, and the rest is cancelled.

Now let’s have a look at another hypothetical student, Terry, who, after completing a three-year course in Management and Finance, also owes £27,000, and lands a £45,000 job. On this comfortable salary, he can fully repay his student loan in twelve and a half years.

Which of the two would have benefited from Ed Miliband’s cap, which would have limited their student debt to £18,000? Why, it is Terry, of course. Jill cannot repay £27,000, and she cannot repay £18,000 either.

If anything, if Miliband wanted to change the repayment system in order to help the Jills, he would have to raise the repayment threshold. But that threshold is arguably already too high, and raising it even further would make a mockery of the whole system of student finance.

Going back to the above example: Jill may not have reached exactly what she wanted to reach, but she is certainly not hard-pressed. Her salary is about equal to the national median full-time salary, making her better off than half of the full-time workforce. The system is already designed in such a way that you have to earn well above that if you are ever to repay the debt.

The fundamental problem is that the graduate premium has declined, while the cost of university education has not. No amount of tinkering with the university finance system is going to resolve that problem, least of all a simplistic measure like a cap. Only a rebalancing of the education system, to end the overreliance on universities, will do so.

An education system that sends almost everybody to university is like a health system that treats almost every illness in hospital, i.e. a health system without primary care, community care and outpatient clinics. We need subsidiarity to ensure greater cost-effectiveness, not price controls or other interventions out of the 1970s toolkit.

This article was originally published by The Conservative Woman.

Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

2 thoughts on “Ed Miliband’s tuition fee cap proposal is wrong in principle and wrong in detail”

  1. Posted 07/04/2014 at 10:04 | Permalink

    The “graduate premium” is there for graduate jobs. The problem is that politicians increased the number of university places in advance of there being enough graduate jobs to accommodate them. Did anyone expect anything other than what’s happened?

  2. Posted 07/04/2014 at 11:57 | Permalink

    @ Peter Michael Ward – Surely the solution is to abolish the student loans system and leave it to the private sector. Potential students would then have better incentives to avoid wasting money on useless courses. Universities could offer scholarships to exceptional students from poorer backgrounds.

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