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Public could foot extra £12bn for student loans after Covid-19

Image: nancekievill, via Shutterstock

Institute for Fiscal Studies warns of financial risks to universities and funding

Public spending on student finance could balloon by up to £12 billion because of the Covid-19 pandemic, a leading financial think tank has claimed.

In a report published 3 November, the Institute for Fiscal Studies warned that the loans system could come under pressure as a looming recession may see new graduates struggle to find work and older university leavers earning less money.

As graduates repay their tuition fees once their income reaches £26,575 per year, the report authors said that “a large negative shock to graduate earnings can dramatically reduce lifetime repayments”, and therefore the Covid-19 pandemic could “increase the long-run cost of the system to government”.

It said that extra costs for past and present students because of Covid-19 were “highly uncertain” but were likely to fall between £700 million and £12 billion, with a central estimate of around £5 billion. At the moment it costs around £17 billion to fund each cohort of undergraduate students.

The report formed part of the IFS’s Annual Report on Education Spending in England, funded by the Nuffield Foundation. It was written by IFS researchers Jack Britton, Christine Farquharson, Luke Sibieta, Imran Tahir and Ben Waltmann.

Elsewhere, the IFS warned that pension costs presented “by far” the largest financial risk to universities and costs were “likely to be higher than in our central scenario”, as deteriorating market conditions led to “lower expected future returns on investments”.

“What share of these losses will fall on universities is still subject to negotiations between universities and employees, but we now expect losses from Covid-19 to exceed £5 billion,” the IFS wrote.

The Universities Superannuation Scheme, a major pension scheme used in universities, said in September that its technical provisions deficit was between £9.8 billion and £17.9 billion, meaning total contributions from staff and employers could rise between 40.8 per cent and 67.9 per cent to pay for pensions. It is expected to publish responses to a consultation with employers on 11 November.

Ben Waltmann, a research economist at the IFS and a co-author of the report, said that the “biggest source of risk now appears to be the large deficit on the main university pension scheme”.

“In the end, student numbers have held up better than expected, but universities still face financial risks from no-shows or higher-than-usual dropout, as well as reductions in other income streams,” he added.

The think tank said that around 12 universities would end up with “negative assets” by 2024, one less than it predicted could go bust in July. Total losses for universities could reach around £10 billion, the IFS said, although the income from tuition fees would be greater than expected and pension losses worse.

While student numbers “appear to have held up for now”, the IFS said universities “might still lose income if large numbers of students drop out before completing their degrees”. It also said it was “impossible to know at the time of writing how many international students have dropped out or deferred at the last minute given the recent rise in Covid-19 cases”.

International students pay higher tuition fees than domestic students, and their money is used to cross-subsidise research.

But the IFS said its predictions “are still subject to a very large amount of uncertainty, largely due to the dynamic and unpredictable nature of the Covid-19 pandemic”.