Managing debt. Or not.

For many policy-makers on higher education wanting to work out how to fund universities the answer has seemed simple: let students pay, but not at the point of use. This policy, which began in Australia and has spread elsewhere, is based on the view that students should be encouraged to enter university, that they should not pay anything up front, but that the cost of their education should be funded through a loan that eventually they will re-pay (or at least will pay if their salary rises above a certain threshold).

However, outstanding student loans are fast becoming the new major debt burden, in America even outstripping credit card debt. A recent report from Missouri documents a high school teacher who, through ‘a series of unremarkable decisions about college and borrowing’, ran up debts of $410,000.

Large debts also quickly become bad debts. In Australia the total amount of unpaid student loans is estimated to be around AU$70 billion. It is too early to say how this will play out in England, but it is unlikely to follow a completely different pattern. So far, nobody has put any particular thought into how this will be managed, and who will pick up the tab.

As I have said before in this blog, I am in favour of tuition fees, not least because the taxpayer simply cannot afford to fund the entire cost of a higher education system that is internationally competitive. I am also in favour of grants made available to support those who cannot afford to pay, so that nobody is barred from higher education by the inability to pay. But I am  not in favour of a loans-based system, not least because the delayed payment makes the student less conscious of the quality or  good value (or otherwise) of the education she or he is being offered, and because it appears to absolve the state from bothering with higher education funding at all.

The debt bubble connected with property triggered a severe global recession towards the end of the last decade. It is time to think again about the funding of  higher education.

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3 Comments on “Managing debt. Or not.”

  1. It is not too early to see how it will play out in England. There seems resignation to the fact that it will be written off (as agreed by HMT) as most will not be able to pay it back. This, as I understand it is not an option in Scotland. I note that the interest rate on the loans hereabouts is so large that the principal is rising faster than the amounts being clawed back – not quite cricket.

  2. Vincent Says:

    I believe that one of the reasons that the loans were accepted by the voter in Australia is the same as my reasoning. The real poor are no worse off, for free education simply allowed the middle class to erect different hurls. One’s they themselves would think odious were they deployment against them.
    Also. There was little true expansion beyond that which would have entered without the subsidy.
    I’m struck all the same by the difference in outlook. I think you’re coming from that of the industry. Like the CBI if you will, while I would be on the customer side. Hardly surprising that, really. But curious all the same.
    For what it’s worth I foresee that there will be vast change in the how 3rd level will be delivered, and by whom. Yes, costs will be reduced. Only not by lessening the numbers attending or the quality but by changing the employment practices. I’d bet you the contracts will increase in value but be of a shorter duration. That legislation will allow easier movement for those who are nearer industry.
    But to get back to you’re points. True, the loan system will collapse, and will probably collapse in the USA too. It’s simply a blood and stone question. If the lender is not paying enough to repay, isn’t it like a bank saying to their teller’s yes you have the repay but only once I pay you above a certain amount. Couldn’t the same scenario be applied to the teachers nurses are et al who are required by a law of the employer to hold a degree.

  3. Eduard Du Courseau Says:

    I have some sympathy for Ferdinand’s position on fees but worry about the cost of accommodation and other expenses that are incurred at uni, neither of which are generally borne by the Westminster govt. and so our kids take out bank loans. Quite simply, it all adds up to an unsustainable debt burden for young graduates. The fact that charging higher fees may not affect participation rates misses the point. This ruse that is repeatedly used to justify punishing the young is disingenuous. The sad truth is that higher education is an inelastic good and in what is in fact a highly regulated market governments know that they can keep on raising fees with impunity and we’ll just have to pay up. Opting out of university education these days is just too risky, whatever the cost.

    You see in Australia the vast majority of uni. students live at home while they are studying and huge numbers also work part-time. Few venture interstate to study and study abroad/Erasmus-type schemes are only for the idle rich. And of course tuition fees are currently lower than here in Blighty and are tiered according to the earning power of students who have completed the course,i.e. Arts is cheaper than Commerce which is cheaper than Medicine. Moreover, Aussie wages are higher and graduate tax repayment thresholds are more lenient than in England.

    All of the above should have been taken into account by the Coalition govt before rushing through a harsh and punitive fee system which hits those of us on fairly modest incomes the highest. The govt could easily afford to reduce the fee expenses to a more sensible level such as the £6k proposed by Labour. But ultimately, as D Willetts boasted, it’s more about changing the behavior of the universities, the savings to the taxpayer, if any, are actually beside the point.

    So I conclude by disagreeing with my initial sentence. In fact, Ferdinand, I find your position either naive or disingenuous, but dangerous nonetheless.

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