Securitising Britain’s Future: A free market solution to university funding
When the Coalition Government increased tuition fees from £3,300 to £9,000 a year, it had done so to provide a sustainable alternative that would boost university’s incomes and cut government spending. But there are reasons to believe this has failed. The Guardian reported that the new funding system is likely to cost the government not less, but more money than the system it replaced. It is time to reevaluate university funding, and I propose the following alternative: a system under which students would agree to ‘sell’ a percentage of their future income to their university in exchange for an education.
Under the current system moral hazard occurs since the universities need not worry about its students’ ability to repay their loans. Instead, the government will bear the costs if students default. This is a problem in desperate need of addressing especially considering that an estimated 73% of graduates will not be able to fully repay their loans.
Under the proposed system in which universities own the income rights to students’ future earnings, the incentive structure would be changed as to align the interests of students, universities and society alike. Universities will factor in how much their education will benefit their students in terms of their future earnings. This allows relative prices to convey how much certain professions are, in fact, valued by society. The university would encourage more students to take up careers that are more valued and it could charge less (in terms of percentage points) for the degrees with better prospects than those with worse.
By contrast, universities today charge uniform rates and have an incentive to provide the most appealing courses - which often mean courses that are enjoyable or easy - rather than being actually useful or valuable. The graduates may therefore lack the skills to be productive members of the workforce, despite accumulating large debts. Universities even have an incentive to admit students it knows will not benefit from the course since it will nonetheless receive government funding.
In turn, universities could sell its future income rights through a process of ‘securitisation’, per course or as a diversified portfolio. This free-market solution provides an equitable opportunity to all, since students’ ability to attend university is not depended upon current wealth but future earnings; thus depended upon skill and merit, not money. This system would streamline all stakeholders’ interests and ‘securitise’ Britain’s free and prosperous future.
Tamay is the runner-up in the 18-21 category of the ASI's 'Young Writer on Liberty' competition.
Government loans for master's students is a risky business
The chancellor announced a student loan system for postgraduate master's degrees in the Autumn Statement. Although many have praised the move, it risks doing more harm than good. There are the obvious unintended consequence of encouraging students to undertake courses that aren't in their (or taxpayers') best interest, but here I'll focus on risks to the nascent funding market for postgraduate loans.
It's certainly a popular policy. As the FT reports: "Universities, unions and business groups have reached rare agreement in welcoming new £10,000 loans intended to ‘revolutionise’ the support available for students taking postgraduate degrees." But the devil will be in the detail. Just consider the Student Loans Company, which MPs recently requested face an inquiry following the ‘persistent miscalculation’ of money paid out in loans that will not be repaid. But more important than the wasted money, the government’s intervention in the postgraduate student loan market risks crowding out private sector solutions.
The failure of the Professional and Career Development Loans (PCDL), which are already subsidised by the government through the Skills Funding Agency, is principally due to banks being ill-suited to lending to students (and one the main reasons for this is because of excessive banking regulation). The analogy with SME business lending is the right one – students, like SMEs, are risky and banks are no longer best placed to lend to them.
Smaller and leaner companies can fill the gap where banks fear to tread. As we have seen with Santander’s partnership with Funding Circle in SME finance, the banks know that nimble companies have the skills to plug gaps in the market. In fact, entrepreneurial companies like Future Finance, StudentFunder and Prodigy Finance are already responding to the demand for loans for postgraduate studies.
Whether the bulk of the money comes from peer-to-peer (P2P) investors, alumni or universities themselves, the plurality of the private sector would trump the one-size-fits all approach that the government could take. We are on the verge of the equivalent of the funding revolution we are seeing in SME finance but this intervention risks stymieing it.
All is not lost. The government will consult on how to put the policy into practice and here they have the opportunity to do less harm than copying the PCDL model. As with SME finance, the government could funnel the loans through providers already in the marketplace. And, most importantly, government needs an exit strategy so that we don’t see mission creep and the destruction of a private sector solution.
Philip Salter is director of The Entrepreneurs Network.
Independent Seminar on the Open Society
Yesterday saw the Autumn instalment of our Independent Seminar on the Open Society 6th-form conference series. Over 260 students from afar afield as Newcastle and Devon descended upon the Emmanuel Centre in Westminster for a day of talks and debate from leading think tankers, politicians and academics. Kicking off the day was the ASI’s own Madsen Pirie, delivering ‘Economics in 2 Lessons.’ Asking students to rank the priority of achieving objectives like clean drinking water, sustainable lifestyles, economic growth in poor countries and an end to ebola, Madsen brought alive the concept of opportunity cost. Moving onto the zero sum fallacy, Madsen explained how so many fail to realise that the economy is not a fixed ‘pie’ to be carved up, and value is created as a result of mutual exchange. The talk provided a solid grounding in how unhindered free trade between individuals makes everyone better off.
Next up was Emma Carr, Director of Big Brother Watch on ‘Civil Liberties in a Digital Age’. Her talk was wide-ranging, highlighting the true extent of state surveillance of individuals, and the actions taken by campaign bodies in response. She also considered the health of the digital economy, looking not only at the impact of surveillance on UK-based tech firms, but the extent to which these companies can manipulate and benefit from our personal data. Considering whether privacy as we know it is dead, Emma argued that it is up to us as members of the public to define the new boundaries, and stressed the importance of good digital hygiene and the use of encryption.
The debate topic for the day was ‘This House Believes That the Living Wage should be mandatory’. Proposing the motion was Deputy Leader of the Green Party Amelia Womack, and opposing it Professor Len Shackleton from the University of Buckingham. Amelia’s argument, peppered with quotes from Churchill and Roosevelt, focused upon the benefits a living wage would bring to local communities and business, and a higher wage floor’s place in a wider re-imagining of society. Len adopted a no-nonsense approach, and laid into the Living Wage’s failings as an anti-poverty measure. The question of age discrimination and equal work for equal pay was also part of a heated discussion. From the floor we saw questions on inflationary pressures, worker productivity and the cost of a Living Wage on small businesses, and despite a passionate performance from Amelia the crowd sided heavily against the motion.
The afternoon saw James Zuccollo, Senior Economist at Reform, ask the fascinating question ‘can fiscal policy make us happy?’ The answer, he argued, is yes. The state can’t really help in areas like family life, but it can help when it comes to issues like unemployment – which causes great unhappiness and declines in perceive self worth – and alleviating economic hardship. James then argued that the government has performed relatively badly on these fronts recently- targeting cuts at the least well-off, whilst protecting comparatively wealthy pensioners. He implored the audience to consider a career in economics, to add balance to the not-so long term economic plans enacted by politicians of all stripes.
To round off the day, Steve Baker MP (bravely!) questioned whether politics was the problem, or the solution. Nobody is satisfied with politics nowadays, but why is that? The problem is not that all politicians are actually lazy, greedy, and corrupt, he argued, but that we expect politics to ‘fix’ so many issues that we’re best placed to solve ourselves. Instead of turning to a distant, central government for guidance on how to live our lives, we should use our own knowledge and compassion to a far greater degree.
Throughout the day the audience was highly engaged, with brilliant questions on subjects from the regulation of bitcoin and foreign policy to reducing the deficit and the rise of UKIP. We also handed over 700 copies of educational, free-market primers to students. ISOS is designed to engage and challenge 6th-form students in a way which compliments the A-level syllabi, and it was fantastic to see such a diverse range of students get involved.
A huge thanks to all our speakers, and the schools and students in attendance who made it such a wonderful event!
The John Blundell Studentships
We are pleased to announce the creation of the John Blundell Studentships. Named after the former Director General of the Institute of Economic Affairs, who died earlier this year, the Studentships are designed to help talented pro-freedom students who are unable to fund themselves for postgraduate work. We aim that this support will help create intellectual ambassadors for freedom among the rising generation.
John was a tireless promoter of the free society and the free economy. An incalculable number of teachers, students, activists, professionals and even politicians were first brought to an understanding of these ideas, and to their own commitment to them, through the work of John Blundell.
This initiative will continue his life's work, of developing minds and ideas, into the future. There is no more fitting memorial. His wife, Christine Blundell, says "John would have been delighted."
More details will be announced soon. In the meantime, we welcome your suggestions, pledges of support and memories of John. Just drop me a line at eamonn.butler@old.adamsmith.org.