Why the way we pay for higher education is everyone’s problem
Anyone working in post-16 education will know that further and higher education often appear to inhabit entirely different universes, especially when it comes to funding.
Because there is a student loan system – fees paid directly to the provider, repayments collected from pay packets by HMRC – HE looks to other parts of the education system to have been financially blessed over the last two decades.
But there are storms ahead, which will have consequences well beyond the universities caught up in them directly. HE providers are currently hollowing themselves out to avoid bankruptcy, and even that will not be enough to save some of them. When they crash, either government will watch huge local employers and skills provision vanish overnight, with all the attendant economic impact, or it can bail out the providers – and that won't be cheap either.
And the government is just watching it happen, because it thinks it can't afford to do anything about it. It thinks that because almost all money for HE is pushed through the fees and loans system, it is aspirant students who decide where that money gets spent. And because providers aren't exactly lining up to expose their books to their prospective customers, a lot of that money is going to places that may not spend it in the best interests of the system.
Government says it can't change this, because it would mean reducing or even eliminating the amount HE is funded by student loans and increasing the amount of direct government spending. Under the current fiscal rules, to do that, government would either have to increase taxes or borrow more. But that's simply not true: the government is already borrowing the money that funds higher education through student loans, because the government owns and runs the Student Loans Company. I repeat: the government is already borrowing the money.
What it isn't doing is being honest about it.
Like all good magic tricks, it works on misdirection. The government borrows the money it will give to universities, but instead of granting it to them directly, it says it is loaning the money to their students. The students don't actually see the money – it is paid directly to the HE provider – but because it is called a loan, and because the government has a contract stipulating how that loan will be paid back, the money that goes out to universities is balanced in the national accounts with a new financial asset: the repayments the government is due to receive from the student in the future. This way, even though the national debt goes up (because the government has still borrowed this money from someone), the deficit – the difference between what the government spends and what it receives each year – barely moves. For two decades it didn't move at all; since 2018, after the statisticians were forced to concede the point, the slice of each year's lending the government never expects to be repaid has been booked as spending straight away. But the rest of the illusion survived its exposure: the repayments government hopes to receive still count as an asset, still soften the deficit, and the fiscal rules still steer by the softened number. The misdirection draws attention to the deficit (flattered) and not the national debt (which has gone up regardless).
If student loans were normal loans, this treatment would be justified. When you lend someone money, and you have a legal right to repayment, you don't record that money as just disappearing – it is simply a different type of asset from the one you had before. But student loans aren't normal loans. With a normal loan, it doesn't matter how much the borrower is earning, or whether they are unemployed, or how long the loan lasts – they need to pay a pre-agreed amount, to a pre-agreed timetable, and if they don't, there are clear legal mechanisms to force them to pay. None of that happens with student loans. Repayments are deducted from salary above a threshold, only when the borrower is earning above that threshold. They are collected by HMRC. They are time limited. There is no credit check. There is no consequence for non-repayment other than continued deduction when you again earn above the threshold. There is a name for money the government compulsorily collects as a percentage of people's salaries: tax. Student loans have always been a tax. The only reason it is called a student loan is that calling it a loan allows the government to record it as an asset rather than as expenditure. When you lend money, the asset (the loan) cancels out the spending. When you tax people, it's just spending. That is a large part of the fiction's purpose: not to fund higher education differently, but to make it look better in the national accounts.
This matters for further education and skills in three ways.
First, it distorts every conversation about how much public money goes into post-16 education. If you believe the headline that students "pay" £9,790 a year for their degrees, it looks like higher education is privately funded and FE is the part that needs public subsidy. The reality is that the taxpayer is underwriting almost the entire cost of English higher education up front – it just appears on a different line of the national accounts. On the day the money moves, virtually every pound of it is the state's: fees flow from the government-owned Student Loans Company directly to providers, before a single graduate repayment has been made, and whatever share graduates eventually pay back, it is the state that fronts the money. FE leaders looking at this system and asking, "where's our money?" are right to feel aggrieved – but the answer is not that HE has found a better model. It's that HE has found a more elaborate way of hiding what the model actually costs.
Second, it makes reform nearly impossible. The accounting fiction creates a trap: if you write off the loans honestly, you have to book the remaining value of the loan as public expenditure in the year you do it. That's an asset currently valued at around £300 billion hitting the public finances overnight. So the fiction continues, the system stays frozen, the fee level stays frozen, universities can't plan, students can't understand what they're signing up to, and the whole structure calcifies – not because anyone thinks it works, but because honesty would be more expensive than the pretence.
Third, it means that any attempt to build a coherent post-16 funding settlement – one that treats degrees, technical qualifications, apprenticeships, and adult retraining as parts of the same system – runs into a wall. Higher education sits behind an accounting structure that was designed to make it look self-funding. Further education does not. Until we are honest about the fact that the state is paying for both, and paying roughly the same way (through taxation, whether direct or deferred), we cannot have a rational conversation about how to allocate that spending.
The Treasury Select Committee recently published a cross-party report under the title Student loans: Broken and Unfair? They were right about the symptoms. But the underlying condition is not that the loan terms are wrong, or that the threshold was frozen, or that graduates feel misled – though all of those things are true. The underlying condition is that the system was never designed to work as a loan system. It was designed to satisfy a specific accounting need. Everything else – the confusion, the resentment, the mis-selling – follows from that original design choice.
If you work in further education, this should concern you. Not because universities deserve sympathy – though some do – but because the fiction that higher education pays for itself is one of the reasons your sector has been consistently underfunded. It is hard to make the case for public investment in colleges and training providers when the dominant narrative says that the other half of the post-16 system has already solved its funding problem. It hasn't. It has just found a more sophisticated way of not talking about it. The first step to fixing post-16 funding is telling the truth about post-18 funding. That means acknowledging that the student loan system is a graduate contribution collected through the tax system, accounting for it honestly, and then asking the real question: given that the state is paying for higher education anyway, how should it divide its investment between universities, colleges, and employers – and what should it expect in return?
That conversation cannot begin until someone stops pretending.
This blog was first published at Skills and Growth.
