Put aside the talk of a rise in student fees. The most important hint given by David Willetts today is that soft student loans, subsidised by the state, will have to be reformed. He’s raising the axe over a indirect giveaway to the middle-classes worth around £1.2bn a year.
“What I want is something that does indeed reduce the burden on the taxpayer but it also has to strengthen the finances of universities in the long term, some of which are in a very fragile state because of the mess that Labour left behind,” he said.
Just consider what would happen if student fees were raised without tackling the student loans. Without stopping the perk, the state could end up spending even more on higher education, not less, in order to subsidise bigger loans. For Willetts to meet his goal of easing the burden on the taxpayer, the interest rates on loans must rise.
At the moment the government offers terms that are beyond generous. The interest payments charged merely cover inflation. That means that taxpayers pay the remaining 2.2 per cent interest (or more in future) to cover the government’s cost of borrowing. It is hardly an incentive for students to pay back their loan promptly.
If some of the savings are redirected towards helping poorer students, raising the interest rates will be fairer for the taxpayer and students. It will allow the cap on the size of loans to be lifted, allowing students to take on the money they actually need. Overall it could provide a more generous and certainly more sustainable settlement for universities.
And of course, it will end a highly regressive subsidy of successful middle class professionals. Remember, with income contingent payments, it will not mean that monthly repayments will have to rise with higher interest rates. It will merely allow the government to extend the term of the loan without losing money. Oh, and it is something even the Liberal Democrats could agree to, at a push.
UPDATE: Here is the key passage from his speech:
The 2004 funding structure has turned out to be surprisingly inflexible. It is in such delicate equilibrium that shifting any single element requires us to shift everything else. If fees were to go up, the Government would have to lend people the money to pay for them – and that would push up public spending. It’s not just that students don’t want to pay higher fees: the Treasury can’t afford them. So the arrangements we have now are clearly unable to respond to the current economic climate.