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Home News Kristian Niemietz: Ed Miliband’s tuition fee cap proposal is wrong in principle...

Kristian Niemietz: Ed Miliband’s tuition fee cap proposal is wrong in principle and wrong in detail

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Political leaders often struggle to find their ‘big idea’, their multi-purpose answer to tackle a range of problems at once. Ed Miliband does not have that problem, he surely has found his ‘big idea’: price controls. Virtually all economists of virtually all persuasions agree that price controls are a terrible idea, but the Labour leader just loves them.

Energy prices are too high? Cap them! Train fares are too high? Cap them! Rents are too high? Cap them! One wonders why Miliband does not simply propose to cap the price of everything, because according to his logic, that should make all of us rich.

Now Miliband has discovered the problem of student debt and student loan non-repayments, and no prizes for guessing how he intends to resolve it: a £6,000 annual cap on tuition fees.

To be sure, the problem of high student debt levels is real, especially for the many graduates – almost half of them – who work in non-graduate jobs. These people experience, in a sense, the worst of both worlds: They have incurred the cost of university education, but not necessarily its benefits, i.e. they are not earning the corresponding graduate premium that would enable them to repay that debt. Yet these people would not benefit in the slightest from Miliband’s fee cap.

Let’s do a back-of-the-envelope calculation, assuming a simple world without inflation, interest rates, or wage/career progression. A hypothetical student, Jill, has just completed a three-year course in media studies, and now owes the Student Loan Company £27,000. Her hope was that the degree would enable her to earn the London median salary of £34,200 per year.

It now turns out that this assessment was overoptimistic: The best-paid job she can attain pays £27,000 per year. So Jill repays 9% of the difference between her salary and the student loan repayment threshold of £21,000, or £540, for a duration of 30 years, which is the period after which any outstanding student debt is written off.  Her cumulative repayments add up to just over £16,000, and the rest is cancelled.

Now let’s have a look at another hypothetical student, Terry, who, after completing a three-year course in Management & Finance, also owes £27,000, and lands a £45,000 job. On this comfortable salary, he can fully repay his student loan in twelve and a half years.

Which of the two would have benefitted from Ed Miliband’s cap, which would have limited their student debt to £18,000? Why, it is Terry, of course. Jill cannot repay £27,000, and she cannot repay £18,000 either.

If anything, if Miliband wanted to change the repayment system in order to help the Jills, he would have to raise the repayment threshold. But that threshold is arguably already too high, and raising it even further would make a mockery of the whole system of student finance.

Going back to the above example: Jill may not have reached exactly what she wanted to reach, but she is certainly not hard-pressed. Her salary is about equal to the national median full-time salary, making her better off than half of the full-time workforce. The system is already designed in such a way that you have to earn well above that if you are ever to repay their debt.

The fundamental problem is that the graduate premium has declined, while the cost of university education has not. No amount of tinkering with the university finance system is going to resolve that problem, least of all a simplistic measure like a cap. Only a rebalancing of the education system, to end the overreliance on universities, will do.

An education system that sends almost everybody to university is like a health system that treats almost every illness in hospital, i.e. a health system without primary care, community care and outpatient clinics. We need subsidiarity to ensure greater cost-effectiveness, not price controls or other interventions out of the 1970s toolkit.

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Kristian Niemietz
Kristian is a senior research fellow at the Institute of Economic Affairs (IEA). He is the author of the book ‘Redefining the Poverty Debate’.

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