See also Part I and Part II.

I’m off to Girona (or Gerona), Spain, this afternoon for a quick holiday on Ryanair (I’ve measured, re-measured, weighed, and re-weighed my carry-on so many times I can’t believe it), so there will be a break of a couple days in these posts. However, I have a bit of time before I head to St. Pancras to catch my train to Luton, so let’s explore repayment of tuition fees in the new English higher education financing scheme.

The government is effectively creating a loan scheme to finance students’ tuition fees. Students have the option of paying some of the money up front, and one would anticipate that well-off parents will do this. However, it’s my understanding that they will be under no obligation to do so, as there doesn’t seem to be any means testing to qualify for the tuition fee repayment scheme. Thus, assuming no bursaries or scholarships (my reading is that “bursaries” are what would be termed “need-based scholarships” in the US and “scholarships” in England would be “merit-based scholarships” in the US), graduates will have accumulated £27,000 in tuition fee debt by the time they graduate. (Three years of satisfactory full-time study earns an undergraduate degree in England.) We’ll mention living costs later on. Graduates won’t start repaying anything until they’re earning at least £21,000/year, at which point they’ll pay back 9% of any income over £21,000 through withholding from their paycheck. If they lose their job or wind up moving into a job that pays less than £21,000/year, the repayment is paused until they get back to the magic threshold. For most graduates, this 9% rate will come on top of a 20% income tax and about 11%, from what I can tell, for national insurance. Of course, the 9% is only on income over £21,000/year, so the effective tax rate is not 40%. If we’re looking at overall taxation, though, we’d better mention VAT, which moves to 20% from 1 January, and council tax, which is effectively a property tax but is paid by tenants rather than landlords in the case of rental properties. My council tax bill as a single occupant is around £60/month.

Earlier I wrote this was effectively a loan from the government, so what about interest? The government will not charge interest until graduates are earning at least £21,000/year, at which point they will charge a rate of 0.15% for every £1,000 earned over £21,000 up to £41,000. For graduates earning over £41,000/year, the interest rate will be 3 percentage points over the retail price index (RPI), which is the standard inflation measure in the UK. Graduates will stop repaying when either (1) they pay off all of their tuition fees and interest or (2) they’ve paid in for 30 years. The £21,000 repayment threshold will be indexed to inflation and adjusted annually. Initially the government proposed only making adjustments every five years (one might see this as possibly a way to evade increasing it by appropriate amounts), but the backlash was so severe that they agreed to annual adjustments.

The astute reader will be wondering how this is supposed to be cutting the deficit if the government is just shifting direct payment to universities through tuition grants into loans to students. Pretty much everyone in the country is wondering the same thing, and it appears that all it is at this point is an accounting gimmick. In fact, some politicians have been touting how now the government will be putting more money into HE. It appears that may very well be the case, especially once they get around to having to write off the loans for those who don’t earn enough over 30 years to pay them off. The government has decided that it will take a couple billion pounds out of the annual budget, allowing it to reduce the deficit. However, it won’t be reducing borrowing, really, just borrowing in hopes that it’s got plans for an income stream that will eventually pay off that debt. Check out this great piece over at THE for more on the calculations. Depending on whose numbers you believe, this may wind up costing the government more in the long run. (The government’s average tuition fee of £7,500/year is almost surely too low, as I’ve already discussed.) Since it’s also costing graduates more than the present system, it’s unclear what the real benefit will be.

As the THE article points out, another area where the government decided to ignore the Browne report’s call for a more market-based HE sector is in terms of enrollment caps. Right now, the government limits the number of slots at each university. The Browne report called for scrapping this, as then the universities that could do a good job of serving more students could recruit them, collect tuition fees from them, and graduate them. As it stands now, universities won’t be able to use higher enrollments to offset for cuts in the teaching grant. Factor in that the Home Office is trying to restrict immigration, including student immigration, and make changes to student visas that will make coming to the UK to study less attractive by eliminating the post-study work option, and you may have a recipe for financial disaster on the hands of English universities. (PSW allows graduates to remain in the UK in employment for a fixed amount of time after graduation. One of the issues with PSW is that right now, a number of graduates aren’t actually working in jobs that require the education they received. Perhaps a restriction that stops foreign graduates from working in shops and pubs but allows them to work as mechanical engineers or research biologists, if that’s the course they read, would be a good idea. The US made some immigration changes after 11 September 2001 that hurt recruitment of international students (and their large tuition payments) to the US. It’s just now realizing that changes need to be made, but the UK seems intent on going the opposite direction instead of learning from others’ mistakes.)

I wrote in a comment to an earlier post that during the debate in the House of Lords, one of the Lords remarked how the movement here is toward adopting all the bad parts of the American system without introducing the features of the American system that offset those deficiencies. The Lord was really on point. So far, we’re looking at a shift toward debt for graduates. OK, that’s a huge part of the American system. However, I’ve already pointed out the enrollment issues for universities, which are (generally) not faced in the US. (A handful of states have official caps on enrollment at a few public universities, and a few cap the percentage of slots that can go to out-of-state students, but that’s about it.) The US also uses a credit-based educational scheme that allows for transfers between universities. There are also programs in place to ensure that students who are disadvantaged economically or educationally can start at a community college to save money or remedy academic deficiencies before moving on to a four-year institution. The UK has no such system, and establishing one could take a considerable amount of time. Although it’s not 100% clear to me, it appears that the government will keep cost-of-living allowances (“educational maintenance allowances”) for poorer students while they’re going to university. This is good, but probably really just compares to the Pell grant program in the US. Other students will be racking up even more debt (probably not subject to the fairly reasonable repayment scheme established for tuition fees) to pay for a place to live and food while at university.

Where the UK is really lacking compared to the US is in terms of institutional financial aid. Yes, the government claims that they’ll be requiring bursaries for the poorest students at universities wishing to charge £9,000/year in tuition fees, but the information to this date suggests the requirements will be very weak. In the US, there is a lot of need-based and merit-based financial aid awarded even at public universities. This aid comes through the generosity of alumni and foundations who see value in higher education (and maybe want a tax write-off, too). It’s often the case that the people giving this money back benefited from scholarships, and now they want to make sure those opportunities exist for future generations. There just isn’t a philanthropy culture in the UK, and it will take a long time to establish one. In the US, a bright student from a middle-income-ish family can attend a good number of public universities and graduate debt-free once all scholarships are factored in. (I’m a pretty good example of this, as my family income was such that I qualified for a Pell grant my first year at NDSU but I also earned enough merit-based aid to graduate with a nice pile of money in the bank. I worked only in jobs that (1) I enjoyed and (2) were relevant to my goals and aspirations while an undergrad.) Even those who can’t graduate debt-free have access to ways to reduce their debt. As best as I can tell, were I to be starting university in the UK in 2012, I’d be graduating with at least £27,000 of debt facing me. That will make you think long and hard about whether attending university is worth it, especially if the payoff in terms of future earnings of a university degree might not be that much higher than someone without one.

In the US, there’s also an expectation that families with incomes above a certain level will save funds to pay for university for their children. These savings are usually built up over the course of 18 years. Here in the UK, tuition fees will only have existed for 14 years when the new rates go into effect, and the handful of families who have been saving will not have had much notice of the drastic increase. I personally think that the funding model for English higher education that has been in place is not terribly sustainable. However, it’s unclear if the new system is any more sustainable, and it certainly isn’t without time to create a cultural shift. If parents have time to start saving for their children’s university education so that their children can graduate with a modest amount of debt and if universities have enough time to raise funds for bursaries and scholarships to help make university affordable, that culture shift might be possible. However, this is something that happens over the span of 20 or 30 years, not two years. That would really be an Americanization of the funding model for English HE. Of course, it would also be sending the message that higher education is not a public good, which is contrary to how most in Europe view higher education.

I do promise to get into why “Nick Clegg” is now a dirty word for most university students and to make some price comparisons between the US and the UK yet, but I’ll leave it here for today.