Why higher tuition fees have left a £1bn-a-year black hole

Nick Clegg said the deficit meant fees had to rise. But the new system will cost the government more.

In defending the coalition’s decision to triple tuition fees from £3,000 to £9,000, Nick Clegg has frequently pointed to the size of the deficit. For instance, he commented in 2010:

At the time I really thought we could do it [not increase tuition fees]. I just didn’t know, of course, before we came into government, quite what the state of the finances were [sic].

In reality, for the reminder of this parliament at least, the reforms will cost the government more, not less. The new fees only came into effect this year, which means repayments won’t kick in until 2015 for a three-year course. In the intervening period, the government will be forced to pay out huge amounts in maintenance loans and tuition-fee loans, not least because three-quarters of universities are planning to charge £9,000 for some courses next year, with a third charging the maximum fee for all (minister previously insisted they would only do so in “exceptional circumstances”).

As a result, according to a new report by the Higher Education Policy Institute (HEPI), the coalition faces a £1bn-a-year black hole in university funding. Having “seriously understated” the cost of its reforms, the report warns that the government will either have to dramatically reduce student numbers, ask graduates to make higher repayments, or pass the bill on to future taxpayers.

It cites three reasons why the new system will cost the government more than previously thought. First, while ministers predicted an average fee of £7,500, the actual figure is £8,234, forcing students to take out higher tuition fee loans. Second, while the Treasury expects a 32 per cent shortfall in loans repayment, the Institute for Fiscal Studies believes the figure will be closer to 37 per cent. The government currently assumes that the average male graduate will be earning £75,000 a year in 30 years time (a reduction from an earlier estimate of £100,000) , a figure that looks excessively optimistic. Finally, the new fees system adds 0.2 percentage points to CPI inflation, triggering rises in benefits and pensions of between £420m and £1.14bn a year (unless, of course, the government, as has been widely speculated, freezes benefits).

The report concludes:

A slightly higher [repayments] cost or a slightly greater inflationary effect than the most optimistic that we have considered here would mean that the present policy is actually more expensive than the one it has replaced.

With the government likely to simply pass the cost on to the taxpayer (as would happen in a purely state-funded system), Clegg’s party is entitled to ask, what was all the pain for?