Gen X v Millenials
Did education funding help fuel contempt?
John McDermott’s analysis focuses on a general overview of some of the reasons for the blame game. This paragraph is a prime example. Similarly, many of these concerns exist outside the US sphere and in very different ways. We take a look at the history of UK student funding.
In response to the highlighted paragraph, it is true that Millennials are the most economically challenged generation outside the American sphere too. It’s possible to argue more so.
I completed my first degree in 1996, after the advantage of paid fees and a tiny grant supplemented by low value student loans. Since then, successive British governments have introduced and exponential raised tuition fees using multipliers capped by successive governments.
1989 Freeze Student Grants
In the build up to the UK’s recession of 1990/91, caused in part by the Conservative government having to find money to finance public services and the resulting hole in the UK budget, student funding was first frozen. Inflation linked rises that allowed students to keep up with rising costs of living, beforehand were now gone.
Inflation was already at 5% and rose to almost 9% by 1991 which meant they were poorer for consecutive years. A student commencing a 3 year degree in 1989 found the cost of their shopping cost 24% more over that period. In essence, making their spending power 81% of what it was.
Additionally, students, once able to obtain certain unemployment benefits, suddenly found that avenue closed and house prices rising quickly, pushing up rents. The proliferation of student accommodation was not as high as it is now. With students having to search for private rented accommodation in their 2nd, 3rd and sometimes 4th years.
It started with the withdrawal of grant funding which baby-boomers and some Gen X enjoyed, but had a lower uptake, as university education was still quite exclusive. Participation in university geometrically increased from 19.3% in 1990 to 33% by the year 2,000. Such a rapid rise put pressure on universities and the scare resources university ecosystems had became high demand resources. You simply couldn’t build student accommodation fast enough. This, atop the resulting UK shortfall in funding of £2 billion accumulating as a result of the early 90’s recession.
A subsequent sharp rise in degree registration and lower economic productivity led the government to pull subsidy funding, including replacing maintenance grants with low interest loans. In turn, forcing universities to lobby to increase tuition fees to cover the shortfall. They won that, although initially it was affordable for students. This was about to take a turn.
1999 - Dearing Recommends £3,000 capped fees.
In 1996, following the publication of the Dearing report into higher education funding commissioned by then Prime Minister John Major, tuition fees were initially introduced.
The power to set tuition fees at the first cap of £1,000 came into force through the Teaching and Higher Education Act 1998. Coming into force in 1999–2000, any repayments not completed after 20 years would be written off, which had the potential to leave the UK government with a funding shortfall. We’ll revisit this later.
Yet, student participation continued to rise, with the succeeding Labour Prime Minister Tony Blair’s mantra of “Education, Education, Education”. His efforts to get 50% of people into higher education, were matched only by the raising of higher education tuition fees. One hand it giveth, the other doth take it away.
2006 —Enforcement of the Higher Education Act 2004
After the adoption of the Higher Education Act 2004, “deferred” tuition fees started to be raised from 2006, through a cap £3,000 and market interest rates. Leaving many current graduates with around £30,000 worth of student debt, accruing interest at the same inflation linked rates of the mid 1990’s. If they’ve not paid any of it off at the end of 2016, a £30,000 loan is worth around £43,000 now. This is still technically manageable over a 20 year period, but was the same order of debt as some mortgages in 1990.
One hand it giveth, the other doth take it away.
Whilst tuition fees were capped at £3,000 some universities insisted on taking up only half that fee.
Yet, universities still continued to struggle as successive hacks to their budget had revoked some 40% of their funding overall. In the interim, universities encouraged more foreign studentships, since they were higher in value, enabling them to charge around £19,000 per foreign studentship.
2010 + Post-Browne Review
In the midst of the financial crisis, the UK had bailed out the banking system to the tone of £37,000 per man, woman and child in the UK. A figure greater per capita than anywhere else in the world, including Greece, Portugal, Cyprus and Spain. Countries many in the UK associate with economic instability, which is certainly not close to true in all cases.
Lorde Browne’s review recommended a controversial increase of up to £9,000 per year. This step change of 3-times the previous value was compounded by market rate interest chargeable from the day of the loan, not the day of graduation. This was rightly met with protests at the time, as debt would be crippling to students, who’s families and themselves had not prepared to save that amount of money. Figures associated with the “graduate tax” were banded about citing the benefit to having degree education, with some reports even suggesting the benefit is in the region of £43,000–£150,000 over the working lifetime of the graduate.
Whilst the lower end of the range is certainly possible, the reality is that after payment of the then existing student loan regime, most people would only benefit to the tune of £15,000. Introducing a £9,000 fee, with a 30-year term and the ability to not pay back the loan until reaching the average wage, which for some professions may be 10 years, will leave a student with around £54,000 worth of total debt upon graduation, including maintenance loans. For those who are struggling to reach the average wage, interest continues to accrue. By the time they pay off their debt (or it is written off by the UK treasury) the debt is going to be worth £170,000. This is mortgage level debt, which in turn contributes in no small part of the housing ownership crisis in the UK.
Associated Analyses
The UK economy is heavily dependent on the housing market. It is a big part of the Retail Price Index, the measure used to determine UK inflation rates. If the housing market drops, the UK economy follows suit. It is precisely why the banking bailout was so high in the UK. We have a high dependency on prime and sub-prime housing stocks as well as foreign trade. 2007/08 say the Freddie Mac and Fannie Mae crash hit our derivatives which in turn, hit our securitised loans on those properties. In turn, hitting ordinary working people. Due to the high dependency on housing and the associated negative equity problems from over-leveraging assets, many people found themselves in very difficult financial positions, even losing their homes as a result.
Additionally, student leaving university at the time of the financial crisis were left without graduate roles as companies placed freezes on recruitment. It took around 5 years to start to clear the backlog and it isn’t clear today. All the while, interest accrues on their student debts, with little to no way of repaying it.
Opinion : Can’t Save Up Fast Enough
Unlike the US market, UK parents and students were not prepared for the sharp rises tuition fees have taken. US parents often invest in child trust funds at birth, building up the necessary capital over an 18 year period, accruing any interest or yields it brings. By contrast, over an 11 year period, UK parents and students had to put up with successive, 3x increases in tuition fees coming as sudden step-changes. Like a car completely breaking down or boiler failing suddenly.
These were increases in rates most were not aware were going to happen and having no means of saving for in the short-term. It also looked like students had a much worse outlook, since employment prospects were poorer and they may never be able to repay the debts.
It is not like parents had 11 years to prepare. Each time, the UK populous was assured that the current cap on tuition fees would be it. Indeed, the Liberal Democrats campaigned the 2005 election on the promise to vote down any bill increasing tuition fees. Yet, the effect of the party’s U-turn whilst in coalition government with the Conservative party, on their stalwart supporters, destroyed it single handed.
Each increase took two years from enactment, to enforcement. Parents and student who saved money for the previous £3,000 fee, perhaps saving £3,300 by the time of enactment of the new act, even with inflationary increases expected, suddenly found themselves totally out of pocket and unable to meet their educational needs.
£3,300 + £9,000 + £9,000 = £21,300 when they needed £27,000. They were £6,700 short. Indeed, by two years at their previous savings rate. Leaving them significantly worse off than before and some families unable to go on to send their children to university. Even if a £1,000 a year rise was allowed, that could be absorbed by many. To step change does not allow a family to prepare. Could you ask for a £1,000 pay rise? In many industries, that’s fairly easy. Indeed, an average eBay side-business can make that.
However, a £6,700 increase is like asking your boss for a 20% pay rise, or more, after tax. This makes such action completely unsustainable and counter to the UK’s best industrial, academic and research interests. It would have allowed universities to build a little capital for any changes in their circumstances and crucially, not build their own debts. As far as I am concerned, not allowing an automatic, inflationary rise and controlling caps through a gradual increase, was a complete, unequivocal failing of Dearing’s original 1999 paper.
This means for every £100 the government lent that portion of people for their degree, it receives £8 back. Hence, as expected, expert fears around a funding black-hole at the time of the Dearing report proved well founded.
Conclusion
The question is what happens to the debts that cannot be repaid? This is a legitimate concern, as the old Student Loan Company sold off the first waves of debts to private debt collection agencies some years ago. This will continue.
In 1998 and 1999 sale of the first raft of 5 to 7 year loan terms saw around £2 billion of the debt book sold to the private sector, with the government initially got back £2.9 billion of lending. Debt sales are common practise across a host of financial sector industries. Yet, they sell for a fraction of the price of the debt. Typically 1% to 10%.
Hence, a £2 billion debt book is worth around, £100 million. Indeed, the government got £160 million, or about 8% of the value of the outstanding debt principle, without interest. This means for every £100 the government lent that portion of people for their degree, it receives £8 back. Hence, as expected, expert fears around a funding black-hole at the time of the Dearing report proved well founded.
As long as there are no more step changes, this will settle in the next couple of decades, as parents are better placed to prepare to send their children to university from birth. Yet, with the benefits of UK university education reducing over time, we can expect higher education to lose it’s standing. Indeed, the rise in apprenticeships is already filling the void in university funding and perhaps rightly so. The question is really what have future governments got up their sleeves? We’ll have to wait and see.
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