Six years ago, the UK’s coalition government revolutionised student finance, shifting the burden of tuition costs dramatically from the state to the individual. Maximum tuition fees were tripled from £3,000 to £9,000 and grants to universities were correspondingly cut. Alongside user charges, ministers introduced a loan scheme for students which ensured graduates would not have to repay any money until their annual income was higher than £21,000. Any outstanding debt would be written off after 30 years.
There were genuine savings to the public purse in this shift — as a rule of thumb each £1,000 increase in the fee, spread over roughly 1m English undergraduates, saved £1bn a year. But there was also clearly a cost to the exchequer from the inherent subsidies in the loan scheme. Plausible simulations suggested only around half of the original loans issued would be repaid, for example.
You would not be able to see these subsidies, however, if you looked at official statistics. The Office for National Statistics decided to count the expected costs of loan write-offs as expenditure only when they were written off after 30 years, treating any accrued interest on the loans which would never be paid as if it were current tax revenue. If the government sold the loan book at a knockdown price, the lost money would never count as borrowing at all, but would reduce government debt.
No one needs a degree in economics to guess the widespread response to the incentives provided by this accounting system but the results are nevertheless shocking.
For universities, the simple incentive was to maximise revenues with bums on seats. Hapless students enrolled in low-quality, cheap-to-provide degrees. All courses charged at the maximum allowable fee, currently £9,250.
After initial resistance to the loans, students accepted the settlement because they understood the government insures them against bad outcomes. There is no functioning market in degrees since it is almost impossible to know the quality of a course in advance. And galloping grade inflation has helped to quell student rebellion.
For ministers, the accounting treatment encouraged higher student numbers regardless of the societal value of a degree because the loans generated notional tax revenues and no costs from the expected write-offs. Not surprisingly, they were keen to raise the interest rate, now up to 6.3 per cent. Since increasing the write-off rate after 30 years carried no cost, they raised the threshold for repayments to £25,000.
With further education not having the same accounting advantages, it has faced savage cuts, forcing young people too often to choose unsuitable degree courses when a technical qualification would have been better. Of course, ministers have also sold many tranches of the loan book at a hefty loss.
The consequence of policy combined with the ONS’s student loan accounting system has been universities offering lousy courses, a dysfunctional market in degrees, grade inflation and the impression all this could be had at no current cost to taxpayers.
The statistical office has won plaudits this week for announcing it will change the accounting system next year, but this is far too generous. The ONS had to be pushed into the change by parliament, as it often has in other classification decisions, ranging from Network Rail to the private finance initiative.
The ONS is independent of government and has a statutory regulatory role in policing the numbers which underpin public debate in the UK. Too often it fails or is too slow, leaving official figures unfit for use. The statistical agency then has to be prodded into improvements, whether in the national accounts, which required the publication of the Bean Review, the retail prices index measure of inflation which is under investigation in the Lords or its dysfunctional migration statistics, criticised by all the experts in the field.
Britain’s official statistics might have been even worse without the ONS having been granted independence in 2007 but, given how things are, that would be a bold statement to make.
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