Student fees policy likely to cost more than the system it replaced

The proportion of unpaid loans is approaching a critical level as write-offs are on track to pass the gains from tripling of fees

The proportion of graduates failing to pay back student loans is increasing at such a rate that the Treasury is approaching the point at which it will get zero financial reward from the government's policy of tripling tuition fees to £9,000 a year.

New official forecasts suggest the write-off costs have reached 45% of the £10bn in student loans made each year, all but nullifying any savings to the public purse made following the introduction of the new fee system.

The universities minister, David Willetts, speaking in response to a parliamentary question from the shadow education minister, Liam Byrne, confirmed that the write-off figure – the resource accounting and budgeting (RAB) charge – is rapidly approaching the 48.6% mark. This is the threshold at which experts calculate that the government will lose more money than it would have saved by keeping the old £3,000 tuition fee system.

The coalition's decision to introduce higher fees shortly after it formed led to rioting on the streets and forced a dramatic decline in the Liberal Democrats' poll ratings, from which the party has never fully recovered.

Lower pay for young adults, an over-supply of those with degrees and the worsening economic outlook have all contributed to the revised civil service forecasts which conclude that far fewer graduates will earn enough to pay back their loans over their working lives. Four months ago Willetts notified parliament that the rate had risen to 40% from 35%. In 2010 the estimate was 28%.

The hasty revision of departmental forecasts means that by 2042 about £90bn out of the overall £200bn in student loans will remain unpaid. The response to the parliamentary question said: "This department has been reviewing our modelling of the RAB charge on student loans. We currently estimate the RAB charge on student loans to be around 45%, which reflects our current estimate of the costs to government of the higher education subsidy to students."

"By its nature an estimate is subject to change as it is highly dependent on macroeconomic circumstances, and the growth of graduate earnings over the next 30 years.

"We will continue to review our estimates in line with the latest data and advice from experts and stakeholders."

Universities will now fear that further cuts to their budgets will be needed to plug the gaps in the Department for Business, Innovation and Skills (BIS) budget.

Byrne said the new figures represented a "descent into chaos". He said: "This is fresh evidence that our university finance system is turning into a money pit. The system is now haemorrhaging cash that will never be repaid and reinvested in the next generation.

"It's high time David Willetts came out and told us exactly how much this strung-together system is costing the taxpayer, rather than dress it up with clever accounting tricks. First, he tells us that the RAB charge is 35%, then 40% and now it hits 45%. It's time to call a halt to this descent into chaos. Their funding model fails the sector, it fails our students and it fails those whose hard earned wages continue to prop it up."

Against a backdrop of serious student violence in December 2010 ministers said that the tripling of tuition fees was necessary to save money in a time of austerity.

Under the new system students repay their loans only when they are earning over £21,000 – and repayments are linked to their earnings.

This week London Economics, found that if the write-off of students loans increased beyond 48.6%, "the economic cost of the 2012-13 higher education reforms will exceed the 2010-11 system that it replaced".

The 45% RAB figure covers the write-off expense of both old and new style student loans. London Economics' Dr Gavan Conlon said that this meant the specific write-off costs of the new loan system were expected to be above 45% and it would effectively be cheaper for the government to have kept the old £3,000 tuition fee system.

"We have always believed that the RAB charge is greater than the official BIS estimates. However, it is probable that the proportion of the student loan book expected to be written off is even higher for students taking out loans in 2012-2013 – potentially up to 50%. This means that there may have been no cost savings to the Exchequer from implementing the recent reforms to higher education," Conlon said.

The National Union of Students higher education vice-president, Rachel Wenstone, said the figures represented a turning point in the debate over student funding and that it had become a failed experiment.

"These revelations blow apart ministers' claims that £9,000 fees would save public money. This confirms our long-held view that the changes were ideologically driven. The government's system costs more than what it replaced and represents a real turning point in the debate about the future of higher education funding.

"Forcing debt on to students as a way of funding universities is an experiment that has well and truly failed. We need a new deal for higher education funding for the next generation of students."

Pam Tatlow, chief executive of the university think-tank million+ said costs were "likely to increase further and raise real questions about whether the upheaval caused by the new system has been worth it".

Andrew McGettigan, author of The Great University Gamble: Money, Markets and the Future of Higher Education called for an urgent enquiry.

"When MPs voted to raise the maximum tuition fee in 2010, the estimated loss on the related student loans was thought to be 30p for each pound issued.

"For that to be revised up to 45p so soon is staggering. When you are issuing £10bn of loans each year, as we are now, that's an unanticipated, additional loss of £1.5bn per year.

"Any claim to savings from the new regime has disappeared and we now need an urgent inquiry into the whole scheme. Something is seriously awry and we need clarification on what this might mean for other aspects of the higher and further education budgets."


Shiv Malik

The GuardianTramp

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