David Willets' latest suggestion for changing the university system, by encouraging banks to offer student loans instead of the government, is deeply worrying. There is, deep down, a reasonable justification for this idea: because student loans are only repaid at a relatively slow rate (9% of salary above £21,000) and written off after 30 years, the government will never recoup all the cost - somebody studying in London for three years after the fee rises come in, and taking out the full £7,675 London maintenance loan, would have to earn £39,500 on average every year for the first thirty years of his working life just to repay the capital, never mind the interest. Ultimately, this means that the government will be paying more to the universities than it receives back from these 'loans', it makes sense to try and reduce the cost of them by having banks pick up the slack.
Even so, this attempt to balance the government's books will be harmful to students. If banks begin to offer student loans, then - unsurprisingly - they'll be on terms much more similar to ordinary loans than they are now. Student loans, at present, are designed not to be a burden - they don't appear on a credit report, and are tied to income, so if you are unemployed, or taking a career break (to raise children, for example) there's no payments to make. In other words, they're a lot more similar to a tax than a credit card debt, precisely so that students don't have the stress that comes with ordinary debt. Turning them into a bank loan - so that students who struggle to get jobs have to pay their loans back while still unemployed, and so that it affects your mortgage applications later in life - would be a retrograde step.
There's also the problem that banks will be more discriminating about who they lend to. Specifically, they won't have the obligation that the government has to lend to everyone, and they'll be aiming to make a profit, which means they'll target universities like Imperial, the LSE, Oxbridge and Durham, and courses like Economics, Chemical Engineering and Law, which have the highest-paid graduates. This isn't just speculation - as the head of Universities UK, who's been in talks with the banks, says in the article, they're interested 'only if the university takes the risk, the government takes the risk, or they do it only for a select few institutions'. This maximises the bank's chance of being paid back - but it means that the government is no longer lending to the top graduates who will repay their student loans, only to those from less prestigious universities doing less lucrative degrees. This could end up as the worst sort of privatisation, where the banks make loans in cases where profits are available, and the government funds those who'll end up as a net loss - almost the same situation as with Royal Mail, where 'postal liberalisation' meant that private companies could take all the profitable business mail work, yet Royal Mail was still stuck with the costly requirement to deliver to every UK address, however remote, for a fixed price.
As the article notes, Santander seems to be heavily involved in these plans, which is even more worrying. Santander provide some of the worst customer service in the UK: they've increased profits by cutting staff, which has meant they can't deal with complaints and problems effectively, to the extent that their chief executive was summoned to explain it to Parliament's Treasury committee. We've already seen what happens when the student loans system breaks down; if we make it less accountable by having it run by banks, especially banks which already have abysmal customer service records, then it can only get worse.
But what alternatives are there? One solution is simply for the government to reverse its policy, and commit to spending more money on universities to cover this gap between what graduates officially owe and what they'll actually pay, but that's not something I advocate. If the government has extra money, then there are other areas it could increase spending on - social housing, primary and secondary education, disability benefits, pensions - which would make Britain better and fairer than increased university funding would.
The better solution is to increase what graduates end up paying. The 30-year payment limit seems arbitrary, and means that graduates who reach high-paid senior roles late in life stop contributing at that point; continuing repayments until retirement would make more sense. Similarly, the £21,000 limit, below which student loans aren't repaid, is new - for those, like me, who went to university before the £9,000 fees were introduced, the limit is £15,000. Although this was an important concession at the time, which made the increased fees less of a burden on students, it isn't serving its purpose: if it means that the government can't afford to fund the loans, and that students have to be funded by banks of questionable quality, on terms which are unfavourable to those who are lower-paid or have time out of work, then they're better off without it.
With these two reforms, rather than having to earn an average of £39,500 for thirty years for the government to get its money back, our average London student would only need to earn £27,000 annually, averaged over his whole career, which now includes any promotions he gets in his fifties. That's a lot more realistic; the mean UK salary, including non-graduates, was £26,510 in 2010, whereas a salary of £39,500 would put someone well within the top 20% of earners (source: Annual Survey of Hours and Earnings 2010, Table 1.7a).
Calculations: Information on loan amounts is taken from direct.gov.uk: £9,000 tuition fee plus £7,675 London maintenance loan for three years totals £50,025, which would need an average £1,667.50 payment per year for thirty years; £1,667.50 is 9% of £18,527.78, for a total salary of £39,527.78 once the £21,000 is added. If that £50,025 was repaid over 47 years (from graduation at 21 to retirement at 68), it would only be a £1064.36 annual payment; that's 9% of £11,826.22, for a total salary of £26,826.22 once the £15,000 is added. All these calculations exclude interest (of up to 3%) and the figures are in real terms (ignoring inflation changes).
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