What Shall I Do Next?

What Am I Going to do Next? Part 12

Where will the money come from?

Dave Gardner

Funding for universities through student loans: why this is a nonsense

In a previous article I noted the inequality in funding between universities and vocational education. Universities get roughly five times as much money per student as do FE colleges. We are still to see per capita funding in the FE sector returned to the level that it was at before austerity bit in 2010. If the same level of funding was applied to vocational education as it was to university studies you can be sure that young people would be flocking to colleges. 

However there is a major catch. Since 2011 it has been government policy to fund student tuition in universities through loans. Fees cost £9250 per annum (more than the cost of teaching a typical degree thus cross subsidising university based research) and loans are available for maintenance as well. A 4.5% compound interest rate applies to your loan from the moment you register on a university course. It is far from unusual for graduates to exit university after 3 years with a debt of £50,000 and mounting. The dogma that living away from home is a necessary part of the university experience exacerbates the problem. As these loans are written off after 30 years, only about half of the money lent will ever be repaid. The rest is on the books as government debt, which we are told, will have to be paid off. In the meantime, graduates have to find a job, start a home, raise a family and all this with a massive (although time-limited) debt hanging over them. It is now proposed that such a loan system be extended to non-university students, those on vocational courses. A rare glimpse of sanity is to offer adults who do not yet have a level 3 qualification the opportunity to get one without paying for it, but for the rest the loans dogma blights the years of early adulthood.

How did we arrive at this lunatic policy that loads students and the government with debt? The government debt we can ignore, as it is a fiction. The government marked up the accounts of students with created money about which it creates the fiction that it was borrowed from somewhere. But the debt is real enough for the unfortunate young people who have to take it out. 

The idea of ‘human capital theory’ is that individuals will invest in their education up to a point where a discounted lifetime net revenue gain disappears. So, since the so-called graduate lifetime earnings premium will exceed the cost of the loan they can and should take out the loan because they have an economic incentive to take out the loan. This is ‘economic rationality’ a dogma of economists and politicians who prefer to think in abstractions rather than the realities of life. One obvious objection to this scheme is that it fails to take account of relative earnings. If graduates are doing non-graduate jobs and are squeezing perfectly competent non graduates out of jobs that they could otherwise do, then the ‘premium’ is illusory. Only if there is a demand for graduates to do jobs that only graduates can do will there be an absolute premium and there is plenty of evidence that this is far from being the case.

There is no problem about paying for education. The problem lies in deciding what education is worthwhile.

But the problem is much wider than this. If our society believes that education is an investment in creating economic and other resources that it values, then there is no reason why it should not finance educational investment up to the point where further investment will not yield any further resources. Rather than an idiotic policy of loading young people with debt for courses they may feel forced to take in order to remain in the labour market, the government can pay universities and colleges for what they consider to be worthwhile education, vocational or otherwise. And they can take a generous view of this, recognising that some courses, for example in the arts may not make an immediately obvious contribution to national wealth but may do so in more subtle ways. But the biggest idiocy lies in the fact that carrying an enormous debt at the beginning of one’s adult life is a crushing and demoralising burden that blights morale and inhibits the formation of households and the raising of families. Without these there is little hope for a society.

Labour Affairs has now argued for some time that a sovereign currency-issuing state like the United Kingdom is not money-constrained but resource-constrained. Investment in education should increase the productive powers of the society, not only through higher levels of skill but through creating a civilised environment which in turn will attract investment. We have also argued that the model of university education prevalent in the UK is not necessarily an unqualified good and that a good case may be made for more locally and vocationally oriented institutions to take more of the load of educating 16+ year olds. This can be done without prejudice to allowing people, either when they are young or later in adult life, having the opportunity to pursue some personal study of their own. Indeed, we think that this should be a right of every worker. There is now slight but growing evidence that some companies realise that it may be better to employ school leavers and put them on apprenticeships in order to develop the specialist skills that they need.[1] Let us hope that this will be a growing trend. A major incentive for young people taking this route is that they will escape the crushing debt burden of attending university.

Education is obviously an investment. Today’s young people form the main resource of any economy and if education is needed to make them productive in the broadest possible sense then money should be no object. Quite apart from direct economic gains in terms of productivity, allowing young people to form families and raise children seems to be an obvious way of ensuring that the society retains and renews its productive powers. 

So who should be paying for vocational education? We suggest that the State should take a considerable burden, ensuring that colleges and equipment are built, suitable workers from industry are tempted into teaching and paid properly to do so and that investment should be directed to those parts of the country that most need it in a partnership between local authorities, trade unions and business associations working together to see that educational investments are wise and efficient and that other facilities such as transport are available, not to mention financial incentives of various kinds to encourage firms to locate there. However, businesses need to make a significant contribution as well as they will be major beneficiaries of any such investment. The existing apprenticeship levy is one way in which businesses will contribute and, as Labour Affairs has argued, this should be expanded deep into the SME sector. A wealth tax can ensure that money is directed from wealthy individuals in wealthy regions to areas in need of investment and can be used to finance locally based banks.[2] Civic and individual components of vocational qualifications can be funded by the state as they are in Germany. 

In short, there is no lack of funding for vocational education. The political challenge lies in mobilising and co-ordinating resources so that they are focused on the deindustrialised parts of Britain. A government serious about levelling up would be doing this. An opposition serious about it would be advocating a huge injection of money into the business of levelling up and would work with its regional leaders to develop a plan to do so.


[1] https://www.ft.com/content/5def6c76-4669-4e7c-8a07-b4bd5f153914

[2] https://www.ft.com/content/7c23d4b3-d7dc-4543-9ef1-c59aa6b11e0d

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