Tuesday, 7 June 2011

Student Loans - Willetts' Disaster

There is a fundamental contradiction in Mr Willetts' "marketisation" of higher education - it goes like this...

1. Except for the extremes of the income distribution, most students will pay EXACTLY THE SAME AMOUNT of repayments, REGARDLESS of whether their fees were £6k or £9k, so the price elasticity of demand is zero - a flat line - there is no price difference in terms of the amount you pay.

2. The level of demand for higher education could rise, fall or remain the same, but surveys show that the demand curve will probably go DOWN, as many people are put off by the idea of having such large debts.


3. Universities understand that they will lose £1 per x of teaching grant in clawbacks, but they will get £3+ per x in fees, so there is a finanical incentive to MAXIMISE the fee level.

4. Demand for university places will be driven by PERCEVED QUALITY, so in crude terms places will fill up top-to-bottom, therefore universities are positioning themsleves in terms of students' quality perception - therefore it makes complete sense to charge the highest fees for the highest quality courses - "if i's expensive,it must be good" in other words.

THE SUPPLY CURVE IS THERFORE VERTICAL @ THE FULL COST FEE OF £9K, whilst the rpice elasticity of supply is also ZERO.

We thererfore do not have a "market" at all in terms of price infliuencing supply or demand.

But it get worse:

5. The Government's own research suggested that at the £6k fee level 30% of student loans would never be repaid because the ex-students' earnings wouldn't generate enough payments over the loan period before the cutoff time expired. If you then project a fee level 50% higher, then working on the standard income distribution profiel, IMHO this non-repayment level rapidly heads north of FIFTY PER CENT.

6. At only a 50% repalyment profile, the cost to the taxpayer of paying for non-repaid student debt and the capital borrowings needed to fund the Student Loan Company spirals rapidly out of control, adding billions to UK government debt.

7. As the whole refor of Higher Education was designed to help reduce UK debt levels and transfer much of the cost of higher education to students, then the reverse will happen, i.e. the policy is entirely self-defeating.

8. Students going into work with £40k+ of debt won' be able to buy homes unless their earnings are quite high - and most won't contribute enough into pensions to get a decent retirement income.

9. The medium to long term forecast IMHO of this is that the taxpayer will have to invest much more insocial housing and provid welfare support in retirement to future generations, which will cost orders of magnitude more than the proposed savings under the new student loan system - all that will happen is that a vast reservoir of personal debt and lack of savings will be transmitted to future generations.

10. The fall i university entry demand will bang down the quality ladder, causing institutions at or near the bottom to be left with empty places, so several will close in future years - 2011 is a "bulge" year.

11. Those who elect not to go to university will either be unemployed, will fall on the government retraining budget, so their costs will simply transfer from education to welfare, or their lack of skills will reduce their employability and earnings profile, so storing up another long term weight on the economy.

Mr Willetts created this situation - he is thought to be as clever as several barrels of monkeys -did he get this all wrong, or did he soresee exactly what would happen and has simply hoped to reach this point then unveil wht he really wants to achieve?

IMHO he is either so arrogant and blinkered that he seriously believed he really would create a market in higher education, mainly because he suffers from a quasi-religious belief in the free  market?

Or is this part of a much deeper plan aimed at drastically pruning back higher education to its 1960s levels?

I think we are the point where to Committee of Vice Chancellors and Principals etc should also add their voice to the criticism of Mr Willetts and pass a vote of no confidence in him as well.

I notice the word "default" is being used about students who d not earn enough to pay off their debt - THIS IS NOT "DEFAULTING" AT ALL - it is the way the system works and if someone accused me of "defaulting" in this way, I'd sue them for slander.

1 comment:

  1. I presume that by making the costs a loan to the student there will not initially be any government liability in terms of debt. It will be off the fiscal balance sheet.

    These debts will not be written off for thirty or so years. At that point the government of the day presumably has to account for that write off.

    This is just another exercise in can kicking.