Could £6,000 Tuition Fees Cost You More?

In January 2012, as sixth formers were hurrying to get their applications in before the UCAS deadline, the coalition government announced that tuition fees would now be capped at £9,000. Having been a prospective applicant myself, I remember the sense of panic that proceeded - gap year plans were cancelled, conditional offers were secured, and retakes desperately avoided - going to university had become a question of now or never.

Now only 3 years later, Labour have pledged a new tuition fees cap of £6,000, arguing that the 2012 reforms actually cost the taxpayer more, as many students will not repay in full the loans that fund them. Yet is this just a tactical election ploy, or a valid reevaluation of the current system?

Under the old system with £3,000 loans, repayments began at 9% for graduates on earnings above £15,000, and loans were written off after 25 years. Now, graduates have to earn £21,000 before paying, although the loans are only written off after 30 years. Yet the sustainability of charging £9,000 fees has become a divisive a topic as the introduction of the £9,000 fees itself.

Some have argued that it is theoretically possible - if borrowing costs are high and graduate earnings are low - that the 2012 changes can actually be more expensive for taxpayers in the long term. Recent graduates have been earning 12% less than their pre-recession counterparts, and if these trends persist, many more students will continue fall below the £21,000 threshold and will not repay part or any of their loans. Indeed, a parliamentary watchdog warned last year that almost half the money lent by the government to students may never be repaid, opening a hole of up to £80bn in public finances.

On top of this, the public accounts committee warned that as many as 48% of the loans paid back through the UK tax system may be written off - a figure that includes students who are unemployed, those who choose to move overseas, and EU students who return home. On the other hand though, government borrowing costs have fallen through the floor whilst 10-year interest rates are standing at -1%, rather than 2.2% as the Treasury originally predicted. What this effectively means is that students are no longer being provided with subsidized interest rates, and so taxpayers may actually be making money out of the loans that they give students.

Furthermore, Labour's plan has not enjoyed as favourable a reception as one might expect. Many universities - fearful of losing their newfound financial autonomy - have been critical of the proposal, and 19 board members of Universities UK launched a pre-emptive attack on the possible policy with a letter in The Times on 2 February. They demonstrated 'legitimate concerns' that the policy would cut support for students' living costs, as critical funds would have to be redirected in order to finance this change. Indeed, many others have questioned how a Labour government expect to be able to find the necessary £10 billion over the next Parliament to pay for such a cut a fees.

Nonetheless, this proposal, alongside Labour's pledge to give 16 year-olds the vote, could make them increasingly popular amongst the younger electorate. Yet we should still question who the real winners will be if they do indeed reduce tuition fees. The Financial Times argues that Labour's policy actually benefits those who become high earners the most, as they will simply have to pay back less. Poorer graduates, who earn too little ever to repay even Labour's lower fees plus interest, will not necessarily be any better off - and neither may the taxpayer.

Image courtesy of Flickr, Creative Commons.