Media Release

Students should no longer take out loans or pay upfront for their tuition

Students should no longer take out loans or pay upfront for their tuition, the Social Market Foundation (SMF) proposes today, in a radical new funding system for financing undergraduate degrees at universities.

The SMF is proposing that:

  • Students no longer take out loans to pay for tuition fees
  • Universities borrow money from Government to cover the cost of tuition
  • Universities repay these loans through the earnings of their graduates above a certain threshold at a payment rate set by Government

This system means that students avoid high up front costs for their degree and universities make independent decisions about how much money they need to deliver high quality teaching.

The SMF is proposing that:

  • Each university be free to set a Graduate Contribution Limit (GCL) – the total amount that a student could eventually repay for their degree. This would not be capped by government and would vary between universities.
  • Each university’s GCL would be based on the reasonable salary expectations of their graduates.
  • Graduates pay the GCL to their university via the Student Loans Company at a low repayment rate and only when they have reached an income threshold.
  • Contributions to the GCL would be suspended after 25 years.

Students would still be able to access maintenance loans at zero real interest rates, but this would be more tightly means-tested.

Authors of the report Ian Mulheirn and Ryan Shorthouse said:

“Raising student tuition fees would be expensive and unfair for taxpayers and graduates. There is an alternative model which combines the best features of a graduate tax and variable tuition fees.

Universities should be able to charge graduates what they like. But they must take on the risk, rather than expecting Government to subsidise their graduates who do not meet the costs of their education.

Asking universities rather than students to borrow money to pay tuition costs ensures university remains affordable to all but also creates a market as those universities who deliver better returns for their students will be able to charge a higher GCL. So universities will effectively be paid by the results they achieve.

SMF has devised a model which ensures access to university remains affordable for all, reduction in public expenditure on the HE sector, greater revenue for universities who deliver good returns for their graduates, a progressive system where higher-earning graduates pay more than lower-earning graduates and a market that rewards institutions that deliver benefits for graduates and employers.”

Editor’s Notes

  • The Browne Review of higher education is set to report on 11 October 2010.
  • Previous SMF analysis showed that Government currently subsidies student loans by providing them at a zero real rate of interest and by allowing debt to be forgiven after 25 years, costing £800 million a year. If tuition fees were raised, students would take on a larger debt for longer, increasing Government subsidy substantially. This could be partially reduced by charging a real rate of interest on student loans, which would mean middle-income graduates paying around £15,000 more for their education that upper-income graduates or those who took out no loan. This would be unfair and create problems for widening access.
  • The SMF proposes that students are no longer charged upfront fees for undergraduate degrees, removing the need for them to take out tuition loans. Instead, tuition costs will be met by universities borrowing from Government and repaying their loans through the earnings of their graduates.
  • Graduates will pay a financial contribution through the Student Loans Company at a rate and above an income threshold set by government. Contributions will be paid up to a limit that is set by each university for its undergraduate courses. Graduates’ contributions will cease once they reach the limit or after 25 years, whichever comes first.
  • To secure loans, universities will have to demonstrate that their graduates’ earnings profiles are such that they can expect discounted contributions sufficient to repay the principal to government with interest. Implicitly, institutions will therefore have to set a Graduate Contribution Limit (GCL) such that their higher earning graduates subsidise their lower-earning alumni, and which take into account interest charged on institutions’ loans.
  • Universities would compete for students on the basis of the contribution limit and the quality of the course offered, producing a market in higher education. Students would be protected from the risk of low lifetime earnings on graduation. Government would shed the entire cost of tuition loan subsidies.
  • This model meets the following key tests:
    • Reduced public expenditure on HE;
    • Maintain or increase funding to good institutions;
    • Affordable access to HE for all potential students;
    • A progressive solution with higher earning graduates paying more for their education than lower earning graduates;
    • A market in HE, with varying graduate contributions.


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