Vast quantities of student loans will never be repaid, representing a massive subsidy not just to students themselves but to universities. No other industry is cosseted in this way, failing universities should be allowed to go to the wall, say Paul Ormerod
The university sector in the UK is in financial trouble.
The annual fee of £9,250 paid by British students has been frozen for a decade. Given inflation, this is a drop of around 30 per cent in real terms. The number of overseas students is starting to fall.
The Russell Group has estimated that English universities lost an average of £2,500 a student a year in 2022-23. More than 50 universities are making job and budget cuts.
The Higher Education Policy Institute think tank has stated that there is a risk of a “domino” effect if one or two universities go under. Lenders could start calling in their debts “left, right and centre”.
If this were to happen, ministers would be under immense pressure to step in and bail them all out.
But it would be a serious mistake. Substantial numbers of British universities represent very poor value for money for the taxpayer. The funds could be put to much better use elsewhere.
Students themselves can feel reasonably aggrieved at the levels of debt which they incur. Tuition fees were only introduced under Tony Blair, so many of their parents will have gone to university for free. Indeed, their grandparents were actually paid to go, with maintenance grants provided by their local council.
According to the House of Commons library, the value of outstanding loans at the end of March 2024 reached £236bn.
In a briefing paper in April 2022, the same library noted that only 25 per cent of students would repay their loans in full. From last year, changes made by the government ease the terms of the loans and perhaps over half of future students are expected to repay in full.
Student loans are repaid under a complicated formula, but as a rough guide you have to make more than national average earnings before you have to make any noticeable repayments.
The simple fact is that substantial numbers of students will never earn enough to repay their loans.
When he was Prime Minister, Tony Blair set the target of 50 per cent of the relevant age cohort going to university. But the labour market offers clear evidence that even the 50 per cent figure is too high. Many students do not get jobs which pay more than average earnings.
The massive amount of debt which will not be repaid represents a huge subsidy not just to the individual students but to the universities.
Imagine the outcry if the government – any government not just the current one – announced that it was going to use taxpayers’ money to the tune of around £100bn to subsidise any other sector of the economy.
In fact, other sectors have had to beg and plead to get any sort of state subsidy at all if they got into financial difficulty. The Harland and Wollf shipyard in Northern Ireland is but the latest example. The Chancellor, Rachel Reeves is reportedly considering a bailout, but her officials appear to have advised against.
Textiles, mines, steel were all once large sections of the economy and are now but shadows of their former selves. In the end, successive governments simply abandoned these industries, major sources of working class jobs.
But the university sector remains uniquely cosseted. It is not just that the rate of return on taxpayers’ money used to support many of the less prestigious universities is zero, the capital itself will never be repaid.
The sad fact is that when an industry as a whole experiences financial problems, it is usually not worthwhile propping it up for a time with state subsidy. Most of the time, the firms in it disappear eventually.
Lessons should be learned and less productive universities be allowed to go to the wall.
Paul Ormerod is an economist at Volterra Partners LLP, an Honorary Professor at the Alliance Business School at the University of Manchester and author of Against the Grain: Insights of an Economic Contrarian, published by the IEA in conjunction with City AM