Why tuition fees have to go

I’ve long argued that exorbitant tuition fees English students are required to pay are a generally bad idea. I’ve described before the impact they’ve had on the running of universities and how they’ve turned universities into money hungry corporations. How it has resulted in students increasingly seeing their degree as a commodity to be bought, not something life changing they are earning through hard work. I certainly see the benefit of students making some contribution towards their studies, after all not everyone gets to go to uni and fees do make universities less dependant on the whims of government. However, the more and more I look on it, the more I feel that given the choice between the no-fees system of Scotland or the supermarket uni’s of England, fees are just not a good idea and should be scraped.

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The arguments put forward for fees are that they would give student better value for money in their education, more choice, it would increase funding to critical courses, such as medicine and engineering and it would cut student numbers. As these statistics show, in all three cases they have failed and the opposite has happened. Students, saddled with increasingly high levels of debt have becoming increasingly dissatisfied with their courses. Given that engineering and medical courses are more expensive to operate, the mercenary nature of some universities has seen them cut back on these course, as well as shutting down various specialised courses and restricting student’s choices (I don’t think I’ve worked in a uni where one course or another wasn’t in the process of being wound down).

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As for cutting student numbers, they’ve been going up until recently. This is just as well, for as I discussed in a prior article, we are entering into an increasingly technology driven age where its going to be harder and harder for anyone without some sort of qualification (a degree, college cert, trade, etc.) to stay employed.

However thanks to the brexit effect and Tory cuts to student grants they are now getting their wish and student numbers are down slightly this year, by about an average of 4%. Now within the meta data there are some alarming numbers, with a 23% drop in nursing, this on the back of a 96% drop in EU nurses coming to the UK to work. So this raises the risk of some serious staffing shortages in the NHS in a few years time.

Another impact of brexit, is that not only have lecturers and researchers begun to leave the UK, but UK universities too are looking to establish campuses in Europe. I recall suggesting that this might happen in the event of brexit a few years ago, and well, now its happening.

Meanwhile students in the UK are now looking at leaving uni with an average of £57,000 in debt. That is a lot of money to end up owing, made worse by the fact that the interest rates are now set to go up to 6.1%. Indeed this is sufficiently high that it for most graduates earning an average entry level salary they will will struggle to pay off just the interest on that loan, and will likely see the principal written off, which basically means the taxpayer pays it.

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So in effect the entire student fees system is little more than a tax on millennials to exploit the fact that they don’t vote, while pensioners (who either went to uni for free or paid a fraction of the amount) get an above inflation pension rise every year. Of course, increasingly, it seems the millennials aren’t willing to pay this “tax” and will vote for a party that promises to scrap it and the brexit voting pensioners can go spin on it (again I recall pointing out something like this might happen after a leave vote).

Also we need to consider a more fundamental issue, effectively by raising tuition fees Osborne and Cameron pulled an old fashioned accounting trick. The accumulated student debt in the UK now exceeds £100 billion, which we’ve established will mostly be written off, but the government won’t have to pay that off for a good few years. So in effect they set up a sort of buy now, pay later scheme and create the illusion that they were cutting the deficit.

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Now “only” £100 billion doesn’t sound so bad against the back drop of a UK debt level of £1,737 billion, 86% of GDP, noting that it was only 65% of GDP when the Tories took over (and the Tories were elected because they claimed that labour had let the debt get out of control). However given that student debt is rising at about 16% a year, so it will be closer to a figure of £300 billion in 2025 (not accounting for inflation). Add in the expected cost of brexit and its economic impact (another £100-200 billion depending on the breaks) and its not too difficult to see how the UK’s debt levels could exceed the critical threshold of 100% of GDP within a decade, worse than every European country, other than Italy and Greece I might add.

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If want to scare away your creditors, you can do it very easily if they discover that you’ve been playing silly buggers with them and there’s a whole block of off the book debts that you’re on the hook for. This is what happened to China recently. The rating agencies cut China’s credit rating due to concerns about debts run up by state owned companies. I was in China at the time and suffice to say, they were less than pleased about this, pointing out that its highly unlikely that all of these debts would go bad all at once and that China’s economy is in a vastly more healthy state than any western state.

Well the danger is that at some point the penny will drop, the rating agencies will apply a similar logic to the UK and we could see a ratings agency downgrade of the UK debts (again!), both public and private. A rating agency cut remember will make everything more expensive, mortgages will go up, personal loans, car loans and yes student loans. So its altogether bad news. Oh and since we are talking about it, as things stand the rating agencies are jittery, telling the EU to go whistle over the brexit bill, you might find its the Chancellor who is whistling if that provokes another credit rating cut.

Now the Tories will probably argue that this is the whole reason why they are trying to sell off student loan debts to the banks. However this risks making the situation worse. Firstly the whole reason for increasing the interest rate was to facilitate this sale. But increasing the interest rate on any loan will increase the default rate yet further. You are also selling off an asset which you know is going to be defaulted on. Its like sub-prime mortgages all over again. And you are creating a mechanism by which a contagion of debt can spread from one institution to another (or to the government). Again, the whole logic behind the Chinese debt downgrade isn’t that the rating agencies doubt China’s ability to pay, its their worry that a default on a loan in rural Gansu province, could lead to the collapse of one local bank and then ricochet through the system until it threatened the finances of the whole country.

Furthermore, saddling young people with an economic millstone and putting them under the thumb of the student loan company (who are known to “punish” students for disloyalty to the UK by ramping up their interest rate), leaving them living on baked beans for many years and putting off important spending decisions (such as buying a house) is not good for the economy. It could lead to economic stagnation (which would prompt another rating agency downgrade!). And why should banks get to profit from that?

So all in all, something has to give. In the first instance, if we don’t actually expect students to pay off this debt mountain, then why make them. Set up a debt forgiveness scheme and cut down student debts to more manageable levels.

As for fees, I still do think that students should pay something for their education, if they can afford to do so. A graduate tax is one idea, or some smaller, more limited level of fees. Alternatively, as pensioners will directly benefit from graduates (i.e. doctors & NHS nurses), maybe going after wealthy pensioners and taxing them (or breaking the triple lock on pensions) might be another solution.

But certainly the current system is just a recipe for disaster. It will lead to skill shortages in key areas, its creating a third level system that is increasingly unfit for purpose and could actually threaten the financial health of the country.

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4 thoughts on “Why tuition fees have to go

  1. If the public debt ratio hits 100%, I don’t see why the Uk will turn into a pumpkin as long as the Uk borrows in its own currency. The US hit ~120% at the end of WWII, and what followed was one of the greatest economic booms we ever had. The private debt on the other hand (~230% I believe for the Uk; including the student loans you’re talking about), that will likely continue to haunt the uk economy until it is addressed.

    I found an article for you:

    View story at Medium.com

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    • There’s nothing wrong with borrowing money….so long as you can pay it back and service those debts even in harsh economic times (falling tax revenue and rising interest rates). The UK (and US) are ageing countries, with lots of expensive and high fixed yearly costs on things like pensions or military spending, with high levels of personal debt (which you yourself point too) and the large debts run up by the UK’s companies. S beyond a certain tipping point one has to question if the UK can continue to service that debt, if there was another financial crisis.

      Not least because the main mechanism by which the UK has got around these issues is through immigration (bringing in young tax payers whose education we don’t pay for and whose healthcare & retirement we also avoid paying for, as the usually leave before getting that old), has been nixed by brexit.

      This is why China’s debt’s were downgraded. At face value it seems absurd, the debt levels in China, both public and private are smaller than those in the UK. China is in a much healthier financial state than any Western country, but it was this fear they could get overwhelmed by a sudden crisis that caused the banks to panic.

      In another example Ireland has generally had a lower debt to GDP ratio than the UK, indeed we were in surplus for most of the 00’s. We are a relatively young country, with a growing economy and a rising population. However, the reason why we got into difficulty was that for about 12 months the economic figures coming out of the country looked scary, tax revenue was falling, interest rates were up, government borrowing had shot up. So the banks panicked and pulled their cash, and we’d have probably ended up like Iceland if we weren’t in the EU.

      The danger is the same thing could happen to the UK, particularly if there were some sort of market panic over the terms of brexit, or the election of Corbyn, or simply the knock on effects of events somewhere else in the globe.

      To draw an analogy, if I asked by bank for a £200k to buy a house, they’d say no problem even though I’d be borrowing many times my own GDP in debt. However if I asked them for just £10k, then £11k, then £12k after that, they’d pull my credit rating pretty quickly and likely tell all the other lenders to roll me down some stairs if I ever ask them for credit. Its not the amount you’ve borrowed, its the context in which you are borrowing it and the lenders assessment of your ability to pay.

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  2. – I think there’s another article out there somewhere about this, but I believe public debt servicing costs over the last several years have been flat or even slightly decreasing.

    The point about private debt that I got from reading Steve Keen’s stuff is that it’s not some ‘one and the same’ that can be combined with public debt to get a general idea of the solvency of a national economy. Partly because policies that lower the public debt tend to raise the private debt. One way out of this is to run a trade surplus, which again is what I suspect is the real reason behind Ireland’s recovery. By definition, not everybody can play that game.

    Another thing I’ve gotten from reading Keen’s material https://www.forbes.com/sites/stevekeen/2016/03/27/the-seven-countries-most-vulnerable-to-a-debt-crisis/#127cae87ce5a
    is that the general financial risk of an economy seems to depend largely on both the private debt level and its rate of change. So China is actually in a much more precarious state than the Uk right now. The US, Uk, and several others are in post-crash stagnating economies where the private debt bubble already burst (in 2008) but the remaining large private debt overhang is suppressing demand. The vulnerable countries are ones that mostly avoided the financial crisis but are now experiencing rapidly rising private debt. Search for specifics in any of these countries and it shouldn’t be hard to find concrete news of bubbles (e.g pretty easy to find news about soaring property prices in Canada).

    Pre-crash fiscal policies are often a mixed bag. For instance, everyone likes to go on about Greece’s public debt, but Spain was cutting their public debt ratio before the crash and still experienced something just as bad- the pre-crisis commonality for both was high and rising private debt, the global collapse of which caused the crisis. After the crisis public debt automatically rose in response to the crisis due to increased welfare state spending and lower tax revenue, and this happens regardless of whether governments do additional intentional stimulus spending. When this series of events is repeated in Canada/Australia, conservatives centrists and neoclassical economists will almost certainly blame the public debt and public spending but they’ll be just as wrong then as they were several years ago.

    Because private debt is such a dragging ball and chain on demand in the US and Uk now, those countries should be using the magic-money-tree capabilities of the federal government to reduce the private debt load. For example, in the US it should probably include a combination of some kind of ‘people’s QE’ program (like the one Corbyn proposed or like the one Steve Keen proposed in his debt manifesto) and lower non-financial-sector corporate taxes.

    I really suggest you read some Steve Keen articles some time. He has policy proposals to the “left” of Bernie Sanders but somehow manages to get a column in Forbes. I’m guessing this means there’s at least some credibility to his financial instincts.

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