Updated: Oct 12, 2021
Student loans help cover the high costs of higher education, unavoidable to succeed in today's job market. But it is necessary to investigate their long-run effects on individual well-being, income inequality and costs for taxpayers.
If you are a student reading this article in England, you are likely to end up with $64,000 of debt in less than 3 years. Your prospects are not much different if you study in the US, where the overall pile of outstanding student debt has reached $1.5 trillion, causing Nobel-winning economist Stiglitz to predict that, after home ownership, the social ladder of education will be the next pillar of the American Dream to crash.
The principle underpinning the debt-based system in the two main education providers in the world is that the biggest direct beneficiary of world-class tertiary tuition, the student, is supposed to take on most of the related financial burden. Hence, for most higher education institutions on both sides of the pond, the most relevant source of funding is now fees, while teaching and research grants (the direct funding by the central government to universities) have become progressively thinner.
In absolute monetary terms, college is still a good investment. Despite rising protectionism, the UK and the US will require fewer and fewer physical labour jobs. Growth mainly comes from innovation and knowledge-intensive sectors, so demand for skilled workers has been increasing continuously over the last decades attracting graduates with rising wages. For England, the IFS estimates that a male graduate earns 25% more than a non-graduate worker with the same A-level outcomes. For women, this gap is even wider. Thus, concerns tend to focus on the implications of high fees and student debt on public finances, on educational and wage inequality across degrees and socio-economic groups and on non-monetary variables, including mental health and life choices, rather than on the fairness of fees themselves.
Focusing again on the UK, the IFS and the Institute for Labour Economics assess the 2006 and 2012 reforms that pushed up tuition fees to £9,250 and contemporarily relaxed the constraints on credit, extending eligibility for government-backed loans to all students, regardless of their background. They conclude that the government’s share of education funding has declined from 80% to 25%, reducing Whitehall’s annual borrowing by £6 bln and taxpayers’ contribution by £3 bln. Contemporarily, as universities’ revenues have been growing faster than the number of students, investment per capita on teaching, research and campus facilities has increased by 25%.
A pressing issue, recently stressed by Ms May as well, is that these increased revenues have not been spent equally on all courses. Low-cost arts and humanities subjects have seen their funding going up by 47% while high-cost STEM subjects only received 6% more income from the higher fees charged. The risk is a costly distortion of research and teaching investment, with expenditure concentrated where it is less needed and productive. At the same time, in fact, arts and humanities students are also those lamenting their degrees for having a poor value-for-money and lower earning prospects even if they face the same fees as other students. This concern is at the basis of the recent inquiries launched by Ms May and the Commons Treasury Select Committee on fees and student loans, respectively.
Considering wealth distribution, the 2012 reform hit the high earners more than lower-income groups. Under the current system, the average lifetime repayment is £9’000 higher than in the past and, while high earners will repay a lot more than before, the low-salary graduates are now better off, due to the higher repayment threshold salary and the complete debt cancellation 30 years after graduation. Higher interest rates, which are now 3 percentage points above inflation, also weigh mainly on high earners, who might end up paying £40,000 on just interest. In 2017, however, the replacement of maintenance grants with mean-tested loans led to an increase in debt accumulated by lower-income families (now up to £57,000) and partly offset the progressive effects of the 2012 reform.
Many observers have focused on the effects of high student debt on career and lifetime choices as well as on mental well-being. UCL’s Institute of Education has recently identified in rising debt a potential cause of declining entrepreneurship among graduates, smaller diversification of career choices as well as lower job satisfaction. Even more worrying for the bigger economic picture is the finding that high debt reduces and delays home ownership and household formation, resulting in delayed marriages and births. Again, these effects are not uniformly distributed. The negative impact of debt on well-being is milder for graduates with a wealthier family background as they can rely on a safety net and spend more time unemployed looking for a good job after graduation.
Since distributional and well-being effects of tertiary education have often been overlooked, new inquiries on the matter are welcome. However, it is increasingly clear that a huge part is played by pre-university education. The fact that, according to the Sutton Trust, Oxford recruits more students from 8 top schools than from 3,000 other state schools should make us reflect on where inequality truly originates.
N.B. This article reflects the author’s opinions only.