The knotty issue of student tuition fees

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I've written before about why it is that Labour, despite years of hinting, has not quite confirmed that it wants to cut fees from £9,000 to £6,000. Over the weekend, Labour has started to raise the cost of the student loan book as the key issue motivating this objective. This creates two further knots.

First, the cost of the system is being overstated. Over the weekend, it was reported that 49.5% of the loan book will never be recouped because of our recent sluggish wage growth, meaning the scheme will cost the government a lot of money. But the truth is that this relies on two questionable assumptions.

The government uses fixed assumptions in its maths, to make sure all departments' maths are comparable. But these figures should not be used, raw and unadjusted, in the real world. They assume, for example, that the cost of government borrowing is currently 3.8%. Today, the real interest rate paid for the government for 30 year debt is 2.05%.

This difference is important: most of the cost of the loan scheme is, of course, getting money to loan out. This difference can more than triple the cost of the loan scheme.

This gap is very large at the moment, in part because of the Bank of England's policies. It will rise (although I don't expect it to recover to the equivalent of 3.8% for a while). And when it does get there, it will probably indicate a robust economic recovery, which will probably mean we have faster wage growth. But that, in turn, will pull down on the loss rate.

Maths problem

This number also rests on the assumption that the government will rapidly hike the repayment threshold, that is the amount you have to be earning before you repay your loan. That is strange. Will we do that? Again, that matters: if you only raise the threshold with prices, it brings the cost of the loan scheme down to about 30%, even with the odd interest rate assumption.

Indeed, if there were a real problem with the affordability of the loan scheme, the Treasury could manage it by adjusting the speed at which it raises that threshold.

Second, there is an intractable arithmetic problem. Think of it like this: there are three people involved in the loan scheme: the government, the students and the universities. If you cut fees, you reduce the contribution from students to universities. But the amount the universities get is, Labour promise, not going to fall. The government is making up the difference.

In short, this policy must cost more the taxpayer more than the old one. Not as much as the £2bn headline cost of cutting fees and replacing them with grants: that is overstated by our public accounting rules. But it definitely costs more.

The government messed up its maths on the cost of the loan book: it is likely to cost more than was pledged - perhaps by quite a lot. But it is still awkward for Labour to mount an attack on cost-effectiveness grounds.

Labour is hemmed in by its desire to be radical while retaining most of the features of the fee and loan system.

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