This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to get this direct to your inbox, every single week, you can sign up here.

This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to get this direct to your inbox, every single week, you can sign up here.

It isn’t fair that a typical UK student leaving university should have debts of more than £50,000 – but it isn’t fair either that working people who never had the opportunity to get a degree should have to subsidise those that do. A university graduate, will over their lifetime, earn between £100,000 and £130,000 more than a non-graduate, even after taxes and student loans. But that is an average. You have to choose the right course. This so-called graduate premium may narrow in the future. And the way we as a country finance our universities is nuts.

Just about everyone accepts that our student loan system is a mess. The outstanding debt at the end of March last year was £267bn and since that was up 12.9 per cent on the previous year, it will be another £30bn or so higher now. It is estimated to reach £500bn by the late 2040s. To put that in context, the UK’s national debt is currently around £2.9trn, so students account for some 10 per cent of the total. The average debt for students in England that finished their course in 2024 is £53,000. 

That is huge by any standards. It is not only the highest in the world, it is also much higher than in Scotland (£18,000), Wales (£39,500), or Northern Ireland (£28,000). By contrast the average student going for bachelor’s degree in the US borrows around $31,000, or £23,000 at current exchange rates.

But not all this money owed to the Government will be paid back. The Government forecasts that only just over half the students who started their courses in 2024/25 will repay them in full, and less than one third of those who started a year earlier will do so. What is officially a loan scheme is in practice in large part a grant scheme, funded by the taxpayers. It gets worse. There is the disgraceful situation where going to university one year later not only hugely increases the amount you are expected to pay, but where some students (those that go on to work hard in good jobs) in effect are forced to subsidise other students that make less ambitious life choices or build their careers overseas. 

We have managed somehow to devise a system that is unfair between the taxpaying population as a whole and young people who choose to go to university, but also unfair between different groups of students. Indeed, if you want to add to the list of iniquities, you could point to the fact that the Government links the interest rates to the Retail Prices Index (RPI) measure of inflation, which is invariably higher than the Consumer Prices Index (CPI). While the Government was crowing about the reduction of the CPI to 3 per cent, the RPI was 3.8 per cent.

You could also include the weak incentives on universities to hold down their costs (because all those in England can charge the full £9,790 a year), and the signal to young people that this kind of debt owed to the Government isn’t like other loans that have to repaid. Try not repaying a mortgage and see what happens.

There is a further danger. It is that the political mood against the whole higher education sector will stiffen. It is very hard to pin this down, and at the moment the demand for graduate jobs still seems to be stronger than for non-graduate ones. However there are signs that employers are less concerned about potential recruits having a degree and are focusing more on practical skills. There is of course the push for apprenticeships as an alternative. But something bigger than that may be happening, not just among employers but also among the wider population. In a time when government budgets are under rising pressure, voters may question the value that universities add to society as a whole.

This is a tough one. A better-educated population will, other things being equal, deliver greater productivity to the workforce and higher living standards for the country. That’s the core case for taxpayers subsidising higher education, and it is hard to argue against. We are fortunate in the UK that we have such wonderful universities, with four in the world’s top 10 on the QS university rankings. But further down the scale there are higher education institutions that probably don’t add much value either to their students or to the country as a whole. And there are courses even in highly ranked universities that may be interesting in themselves, but don’t lead to great careers. Should they be subsidised by not-very-well-off taxpayers?

It’s vital to preserve educational freedom, and that involves study in areas where there is no obvious pay-off. Universities should be preparing young people for life, not just for jobs, and in any case we can’t know the skills that they will need a generation from now. But those same universities should be careful to offer better value to the country – and ask themselves whether they are doing so right now. We have to fix the student loan scheme in a way that is fairer to both sides.

It’s hard to catch the changes in political mood, but there are several pointers to just such a shift building in attitudes to higher education. Two are noted above.

One is the whole student loan business – is it still worth it to get a degree, and if so does it make sense to borrow from the Government at interest rates of up to 7 per cent? The proportion of school leavers going to university does seem to have levelled off, falling from a peak of 38 per cent in 2021 to 36 per cent last year.

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A second is the point about employers apparently shifting preferences to people without a degree. I say apparently because we don’t have the data yet to see whether this is a substantial and solid trend, or simply a few fashionable comments by some companies trying to widen their recruitment base.

There’s a third point, which may be a false link but is worth exploring. It is the way in which an idea that the liberal establishment assumes has widespread support can be suddenly rejected. The example is the target of 0.7 per cent of GDP going to development aid. We have cut that by more than half, with hardly any political pushback. France and Germany have also made cutbacks, albeit smaller ones so far. Donald Trump canned USAid, with some opposition but I suspect much less than expected. He has also attacked the elite end of the university sector, the Ivy League.

I am not suggesting for one moment that a future UK government would mount a similar attack on our Russell Group of university institutions, but I fear our elite universities are much more vulnerable to funding cutbacks than they realise. I don’t know how we will tackle the student loans scheme, but I am pretty sure that the sector will end up with less government support than it gets right now. And I fear it won’t see this one coming.

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