The “big impediment” to raising the cap on undergraduate tuition fees is the public perception that student loan debt is the same as credit card debt, a top economist has argued.

Nicholas Barr, professor of public economics at the London School of Economics, told an Institute for Fiscal Studies conference that the Government needed to be “cautious about how far and how fast” it raised the £3,000 fees cap, because the point had not been made that loan repayments are payroll deductions.

Professor Barr argued that the Government’s fees review later this year ought to find in favour of an increase, but only by a relatively small amount.

“The big impediment in Britain is [that] so many people… still conflate Student Loan Company debt with credit card debt… But this isn’t credit card debt, it is a payroll deduction,” he told the conference in Cambridge on 3 April.

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“I tell parents: ‘You don’t know how bad it really is. If your child has a typical graduate earnings trajectory, over a full career she’s going to pay the Government £1 million in income tax and national insurance contributions.’ Compared with that, £20,000 of Student Loan Company debt is really very small beer.”

The fees cap must be set high enough to bring in significant extra resources and create genuine competition, but low enough to “maintain political sustainability” by giving students, prospective students and their parents time to adjust, he said.

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“If you raise [the cap] by more than a small amount, you can see the tabloid headlines… Until the idea that income-contingent repayments are a payroll deduction has been properly internalised, I think [politically] it would be a… bad place to go.”

Professor Barr argued that the existing low-interest loans – which he described as “enormously expensive” and “deeply regressive” – were the “central distortion” in the current system and the single most important area for reform.

Because of the “blanket interest subsidy”, about one third of the money lent to students is lost because the rate of interest graduates pay is lower than the rate at which the Government borrows. The main beneficiaries are high earners who pay off their loans quickly, he said.

Professor Barr said he was in favour of raising the rate of interest on loans to cover the Government’s borrowing costs, but with interest subsidies targeted at graduates with low earnings or caring responsibilities.

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He also favoured subsidies for key workers in the public sector, which would see a proportion of their loans written off for each year they worked in a particular sector. This could be a powerful policy lever, he added.

Charging an interest rate equal to the Government’s cost of borrowing would allow it to sell on student loan debt “at a sensible price”, making a higher cap more affordable.

Under the present system, the cost of loans to the Treasury is such that they have to be rationed, he said. It was no accident that part-time students and UK postgraduates were not entitled to them, something he described as “inexcusable”.

rebecca.attwood@tsleducation.com