One year ago today, Jeremy Corbyn pledged to scrap loans for university tuition, as the flagship policy of his leadership campaign. Since then, however, the Labour leader and his frontbench have been almost silent on the topic. Corbyn said it would take ‘serious debate within the party’ before ending fees became official policy, and one shadow minister called it a ‘hypothetical, theological’ question.
The reason is money. The Labour party thinks ending tuition fees would involve significant up-front costs – maybe £7 bn per year – and dares not make a spending pledge without a way to pay for it. New Fabian Society research shows that this need not be the case, however. Today we publish proposals, which we think the whole party could unite around, to replace the current student funding system.
The English university finance system is a disaster. Young people now face typical debts of £44,000 on graduation, according to the Institute for Fiscal Studies. Three quarters of new graduates are not expected to pay off their loans by the time their 30 years of liability expires. And throughout that period, they will face eye-watering marginal tax rates of 41 to 56 pence in the pound, which will leave them little better off as their earnings rise. How they will be able to afford a home, a pension and a family too is anyone’s guess.
And because student debt is so unaffordable for graduates, the system is expensive for the government too. In future years the state may have to subsidise and then write-off approaching half of the debt it issues. It is a terrible deal for both the exchequer and the individual, because the sums involved are just too great for people to pay. Whatever you think of the principle of higher education fees, the maths on loan-funded tuition does not stack up.
The Fabian proposals would end UK-based graduates paying for their tuition, but they do not entail an increase in immediate revenue spending by the government. Higher education would be funded by new personal education accounts, rather than directly by taxes. The accounts would work as a hybrid loan/grant scheme, with education debt issued as it is today but then written-off progressively over time. Each year the government would pay down some of the debt, staggering the public expenditure on each student to span most of their working life, to mirror the economic returns on the investment.
The plan would also deliver on another promise from Corbyn’s 2015 campaign, to create a ‘national education service’ for adults. The accounts could be used not just for university, but training and further education too. This would create a significant new entitlement to funded lifelong learning.
The proposals form part of wider Fabian research on reviving the contributory principle in the welfare state and our idea is that the education accounts should become part of the national insurance system. Today people in the UK earn a state pension by gradually building up a record of contribution over many years. Under this scheme, people would ‘earn’ free post-19 education in the same way, by having debt in their education account written-off in exchange for their participation in the labour market and society.
National insurance would therefore become a scheme for investing in people in the first half of their lives, on the basis of their future contributions, not just providing insurance and pension income on the basis of previous contributions. For if we are happy to provide generously for pensioners on the basis of what they have done in the past, should we not be prepared to invest as much in young adults, on the basis of what they will offer in the future?
Over their working lives people benefiting from university and other adult learning would not pay a penny more than their usual national insurance payments – and the new accounts would sit alongside the state pension as a central pillar of our contribution-based welfare state. This is a policy that Labour politicians of all stripes can endorse. It is Corbynism made practical and affordable.
Core features of National Insurance Education Accounts
- The government would create a system of ‘National Insurance Education Accounts’, either for England only or on a UK basis, in collaboration with the devolved governments. Depending on the outcome of Brexit negotiations, EU students studying in eligible UK institutions could also be included.
- Every adult under a certain age (perhaps 35 initially) who had not been to university would be eligible for an account worth enough to fund a standard undergraduate degree (approximately £9,000 per year x three years). The annual entitlement would be set to match the annual value of the state pension in order to build inter-generational solidarity and establish parity between investment and protection at different points in our lives. The money would be available for people to use whenever they wish to, either on higher education or validated training or further education.
- The accounts would work like state pensions in reverse. They would begin as a loan, but each year a slice of the debt would be written off, on the basis of the recipient’s NI contributions or credits. After (say) 30 years, all the debt would be written off (the longer the period, the lower the early costs). A graduate would not need to repay any of their tuition fees, as long as they spent most of their working life in the UK. People living outside the UK would need to start repaying after a number of years without NI contributions or credits.
- As with student loans today, the creation of each initial education account would add to the national debt but not to government spending. Extra public spending would only arise gradually, in annual slices of around £300 million, as the loans in the accounts were written off. Compared to the current system there would be no immediate impact on either public expenditure or debt. This is analogous to how accountants gradually recognise the costs of capital investment over its entire useful life.
- There would be no need for artificial caps on the number of students and the scheme could be used to fund all forms of economically productive post-19 education. The reform would therefore remove the bias in the current system in favour of higher rather than further education; or full-time study over part-time study. Lending to more people would be expected to pay for itself in the long term, by generating higher productivity, earnings and tax receipts.
- Future levels of tax would need to be higher, in order to fund the existing volume of higher education funding. The additional cost would be the difference between the value of the education accounts and the lifetime cost of the public subsidies on the same debt today (which is approximately half their total value). Eventually (after around 30 years) this would amount to £4-5 billion, in 2016 prices.
- Some of the extra costs of the scheme could be funded by raising national insurance contributions on high earnings – say from 2 pence to 4 pence in the pound – for people eligible for the accounts (ie a higher top rate of NI for younger cohorts). This would reflect how much these proposals would improve the ‘offer’ for graduates with high lifetime incomes. If this approach was followed, the proposal would have some resemblance to a ‘graduate tax’.
- Under this reform levels of conventional debt per graduate would fall by more than half (ie maintenance costs only) so repayments would become much more affordable for graduates and much less expensive for the exchequer to subsidise. Parallel reforms to social security could be introduced to reduce the need for student debt further (eg a youth allowance for all young people studying or training).
The proposal for National Insurance Education Accounts were developed as party of a wider project ‘Social security in the 2020s’ which was kindly supported by Shelter and Legal and General.
Image: Md saad andalib