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University fees controversy

Kids | School Fees

By Justin Modray, published 13 October 2010.
Helpful? 8

University fees have hit the news this week as a controversial report proposing an increase in both fees and the interest charged on student loans was unveiled. What could the propsosed changes mean for your offspring?

The Independent Review of Higher Education Funding and Student Finance Report, by Lord Browne, effectively aims to curb government spending on university costs.

What are the proposals

In a nutshell the proposals are:

  • Removing the current £3,290 cap on annual university fees.
  • Increasing the interest charged on student loans from inflation to inflation plus the government's cost of borrowing (currently estimated at 2.2%).
  • Increasing the income threshold for repaying student loans from £15,000 to £21,000.
  • Replacing current maintenance loans (to cover living costs) of £4,950 - £6,928 a year with a flat annual loan of £3,750.

Why are spending cuts required?

Under the current system the Report estimates that of the typical £6,100 annual tab for proving a course, the taxpayer pays around 54% of cost for students from higher income families rising to 72% for students from lower income families.

Add in the cost of subsidised maintenance loans and the bill to the taxpayer is around £6.2 billion.

With higher education growing in popularity and government debt standing at £823 billion (forecast to grow to £1,316 billion by 2015/16) the current position is unsustainable. Hence the cuts.

Do the proposals mean universities could charge as much they want?

Yes, but the Government would discourage universities from charging more than £6,000 a year by taking between 40-75% of any fees above this level.

How significant would the proposed increase in student loan interest be?

Very. At present interest is charged at the lower of either inflation (measured by the Retail Price Index) or the base rate charged by several banks plus 1%. The proposals would increase this by the cost of government borrowing, estimated at 2.2% in the Report (it's not clear whether inflation will be measured by RPI or CPI in future), once the student starts repaying the loan.

This means that whereas a current loan of £20,000 would cost around £25,500 to repay including interest (assuming inflation of 3%), under the new proposals the total costs could soar to over £39,000. This reflects not only the higher interest rate, but also the reduced rate at which the loan is repaid if the income threshold for repayments rises from £15,000 to £21,000.

And what about the proposed reduction in maintenance loans?

This too could hurt as the money that students can currently borrow cheaply may have to be borrowed commercially (via banks) at much higher rates of interest.

Do the proposals include support for students from low income households?

Students from households with an income of up to £25,000 could be eligible for an annual grant towards living costs of £3,250. But they'll have to foot the bill for tuition fees via a student loan as per other students.

When could any changes be introduced?

In theory they could come into force by the 2011/12 academic year. But this is a hot potato that could cause a big rift in the coalition Government, so expect lots of debate and pressure for alternatives. Nevertheless, the Government needs to cut spending, fast, so I think their introduction (broadly in line with the Browne Report proposals) is fairly likely within the next two years.

What can I do to prepare for the possible rise in costs?

Parents can try to set aside some money to help contribute towards living costs while their offspring are at university. The key is for students to avoid building up non-student loan debt that could prove very costly over time.

Once the student graduates and earns above £21,000 (under the proposals) then student loan interest will increase by the cost of government borrowing. This may still be a fairly cheap way to borrow in the scheme of things, but the sooner the graduate can clear the loan the better (unless they have more expensive debt elsewhere). So any assistance from parents/grandparents in doing so would no doubt prove very helpful.

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