The student-debt time bomb can be defused

Whether one agrees with the policy or not, one should think that a trebling of tuition fees cannot but result in a bonanza for universities, and huge savings for the Treasury. Yet according to recent departmental forecasts, 45 per cent of student loan monies may never be repaid, leaving only minimal fiscal savings. Opponents of tuition fees, such as the National Union of Students (NUS), have proclaimed the coalition’s reforms an abject failure. Are they right?

Not necessarily. It is advisable to take a closer look at what explains these headline figures. In its 44th report on student loan repayments, the Public Accounts Committee examines the Student Loans Company’s (SLC) debt collection process, and finds it seriously flawed. If a graduate moves straight from university into a job, and earns more than the threshold income of £21,000, debt repayment works smoothly enough: through the PAYE system, those people pay 9 per cent of their earnings above the threshold to the SLC.

But many debtors’ employment histories are a bit less straightforward than that, and this is where the problems arise, because the SLC struggles to keep track of those. According to the Public Accounts Committee, the SLC ‘lacks information on what 368,000 graduates who are not repaying at the moment but are still classified as being in the “repayment” category are currently doing.’ Graduates who live abroad pose a particular problem for the SLC.

So the debt recollection system is clearly broken, but this does not mean that the system of financing higher education as such is broken. The SLC may not able to keep track of its debtors and of changes in their financial circumstances, but this does not mean that it is not doable – banks have been doing it for centuries, after all. The real question is why student loans ought to be managed by a public sector organisation at all.

In addition, the income threshold for debt repayment is set too low. Exempting those on low earnings from repayment seems reasonable. But it has to be kept in mind that people have to earn not just above, but well above the threshold before their repayments become sizeable enough to eventually clear the debt. Under the current system, an ex-student earning £23,000 per year would only pay £15 per month in debt repayment, while for somebody earning £25,000, monthly repayments are still no more than £30. At that rate, it takes forever to repay the debt. Why not lower the income threshold to, say, £18,000? That would raise average repayment rates, while also demanding a modest contribution towards repayment from those on more moderate earnings, e.g. £15 per month for those earning £20,000.

So debt write-off could probably be slashed by a combination of parametric reforms and a rationalisation of the debt recollection process. But balancing the books cannot be our only goal. There is a deeper problem that cannot be solved in this way, and that is the fact that the education system relies too heavily on universities.

Expanding alternatives to university education – high-quality apprenticeships, vocational academies, technical colleges etc. – would bring two advantages: it would offer those who are not really passionate about academic education a more cost-effective option, and it would increase competitive pressures on universities. Both would contribute towards lower levels of student debt, but more importantly, more people would be able to acquire the kind of skills that they actually want.

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).