FREE TO CHOOSE – June 2019

Our post-18 education system is broken. The total value of outstanding student debt has already passed £100 billion and is forecast to reach around £450 billion by the middle of this century. With the vast majority of universities charging £9,250 per year for undergraduate degrees, students are typically finishing their courses with £40,000-£50,000 of debt. Worse still, almost one-third of graduates are now in non-graduate jobs and can find themselves earning less than if they hadn’t attended university at all. Not only is the plight of graduates creating significant political and financial problems, colleges and apprenticeships remain under-funded and under-utilised after successive governments have chosen to emphasise the supposed benefits of attending university at the expense of other options available to learners of all ages. Hence, from multiple perspectives – long-term viability, financial sustainability, educational equity and social mobility – the current system is failing to deliver consistently positive outcomes for students, taxpayers and employers.

In recognition of these deep-rooted issues, the Prime Minister Theresa May launched a review of post-18 (‘tertiary’) education in February 2018. The review, led by Philip Augar, was tasked with focusing on four areas:

  • Choice: identifying ways to help people make more effective choices between the different options available after age 18;
  • Value for money: looking at how students contribute to the cost of their studies to ensure funding arrangements are transparent;
  • Access: enabling people from all backgrounds to progress into post-18 education, while also examining how disadvantaged students receive additional support;
  • Skills provision: future-proofing the economy by making sure the post-18 education system is providing the skills that employers need.

Inevitably, the political sensitivity of university tuition fees has meant that it continues to dominate media coverage of the ‘Augar Review’. However, in her speech that launched the review, it was striking how often the Prime Minister referred to ‘tertiary education’ and she was clear that the review will look at “the whole post-18 education sector in the round, breaking down false boundaries between further and higher education, to create a system which is truly joined up.” Consequently, this report seeks to deliver the Prime Minister’s ambition by creating a single funding system to underpin a single tertiary education system in which universities, colleges and apprenticeships can all thrive. To this end, instead of focusing on how much the government should invest in tertiary education, this report focuses on how the government should invest. If the objective is to reduce spending on tertiary education while meeting the Prime Minister’s four goals for the Augar Review, students will have to start making different choices about what they study, where they study and how they study after age 18. The simplest and most effective way to achieve this is to put the funding for tertiary education in the hands of the students themselves.

The concept of handing control of public funding to users – often referred to as ‘personal budgets’ – is not new. Other sectors, most notably social care, have been operating such models for many years. The last notable attempt to introduce a similar model in education was implemented in 2000-2001 by the previous Labour Government, only to end in ignominious fashion with accusations of fraud and millions in wasted taxpayers’ investment. Nevertheless, the problems faced by ministers and civil servants at the time (e.g. ineffective quality assurance systems) are eminently solvable in the present day. Other countries such as France and Singapore have already rolled out schemes of this nature in recent years accompanied by substantial financial backing from their respective governments. The Prime Minister’s review of tertiary education provides the ideal opportunity to reopen the conversation about personal budgets for education and training, given that they are the most effective mechanism for creating a level playing field between universities, colleges and apprenticeships.

New Individual Education Budgets for young people and adults

After completing compulsory education at age 18, each learner in England will be eligible to access an ‘Individual Education Budget’ (IEB) in their name. This IEB will act as a ‘learning account’ into which the government will place up to £20,000 to be spent on education and training, with the precise sum being dependent on a number of factors (e.g. whether or not a learner is from a disadvantaged background).

The current system for funding HE and FE is heavily based around student loans, in the sense that there is little up-front funding available (which historically came in the form of grants) as students are instead expected to accrue debts in the form of student loans to fund their learning. This means that a large proportion of government investment in HE and FE comes in the form of providing subsidised loans and then writing-off unpaid debts over time. This report proposes a shift away from this model, at least in part, by reintroducing a form of grant funding to be paid to learners before they enter tertiary education while also maintaining access to loans if they are still required. This report outlines three models for deciding the level of grant funding that will be placed into learners’ IEBs, with each model being based on a different set of underlying principles. That said, the significant weighting of funding towards learners from the most deprived backgrounds is a core feature of all three models to reflect the consistent finding within the research literature that these individuals are the most averse to accruing student debt. The three models are based on a ‘sliding scale’ of deprivation, with learners from the most deprived backgrounds receiving up to £20,000 at the age of 18 to spend on education and training. Providing this funding to all learners will cost £1.7-3.4 billion per year depending on the precise model and combination of deprivation factors.

Adults who have left compulsory education but have not previously taken out a student loan will be able to open an IEB. They will receive a small opening contribution from government towards the cost of training courses and programmes, depending on the highest level of qualification that they currently hold. Adults who have already taken out a student loan will be rolled into the new IEB system.

Even if learners have already finished their formal education, ensuring that they can access financial support for upskilling and reskilling in future remains an important consideration. Consequently, adult learners should also be entitled to open a new IEB and those with the lowest levels of qualifications should receive greater investment from government. This report includes several scenarios for how much this would cost, starting at £844 million to provide a £150 investment for all adults qualified below Level 2 (GCSE standard). It is envisaged that any adults with existing student loan debts will have access to the same IEB system as new entrants and adult learners, and whatever loan they have already received would count towards their new ‘lifetime loan limit’ (see Recommendation 6). This would mean that all learners, regardless of their age or prior qualifications, would be treated in the same way and have access to the same support.

Creating the necessary infrastructure

The new IEB system for young people and adults would be operated by the Student Loans Company. Any funding given to each learner when they open their IEB would be credited as a ‘negative balance’ in their account.

Rather than setting up a parallel system for IEBs to run alongside the Student Loans Company (SLC), it is envisaged that the loan accounts operated by the SLC will essentially become the new IEBs. When a learner opens an account with the SLC, they will be notified of their entitlement to an investment by government into their IEB (the level of investment being dependent on which of the models described in this report is chosen by government). Whatever investment a learner receives will be credited to their account with the SLC as a ‘negative balance’ e.g. if a learner is entitled to receive £6,000 of government investment, their IEB (student loan account) will display a balance of -£6,000 to represent the fact they, in effect, are owed that money by government. If and when a learner chooses a course or qualification that they wish to spend their funds on, the SLC will simply disburse the relevant sum to the provider (e.g. a university), as they do now, and the learner’s balance on their account will be adjusted accordingly. After an IEB is opened by a learner, the account will stay with them over time, irrespective of whether they change jobs or careers. This is a crucial facet of any successful lifelong learning strategy, as shown by France, Singapore and other nations.

The money in each IEB can be spent on any approved and regulated qualification from Level 2 upwards.

The new funding system of IEBs should give learners the opportunity to select any approved and regulated qualification from Level 2 (GCSEs) up to Level 8 (doctoral level). This will encourage the learner to choose the most appropriate course to meet their needs at any given time, ranging from basic skills training (e.g. Functional Skills) up to more advanced academic and technical courses. To accompany this flexibility for learners, government will need to be clear about which courses and qualifications it deems eligible for funding at each level to prevent IEB funds being spent on inappropriate courses (e.g. those that lack rigour and / or do not have valid and reliable assessments).

IEB funds and student loans must be spent at a registered provider that is regulated by either the Office for Students or Ofsted.

The quality assurance systems now in use across the different areas of tertiary education in England will provide a much more robust defence against malpractice compared to what was in place during the Labour Government’s experiment with ‘learning accounts’ in 2000-2001. This report recommends that the funds given to each learner in their IEB and any student loans that they choose to access must be spent at a regulated provider. This could be a university or other HE institution regulated by the Office for Students or a college or private training provider regulated by Ofsted.

A new student loan system

The IEB system would be supported by a single student loan system that encompasses all provision. It will cover the costs of tuition at all levels and will also offer maintenance support for courses at Level 4 and above. Each IEB would have a lifetime loan limit of £75,000 for each learner, which would come into effect once their initial funds from the government have been depleted.

This report proposes that the government convert the existing student loan system into a lifetime ‘draw-down’ account available to all learners. This will cover the costs of tuition for all forms of provision and can be accessed multiple times, unlike the current student loan system that operates as a ‘single shot’ account. At Level 4 and above, the loan system will also be available to cover living costs (i.e. a maintenance loan), meaning that learners will be able to access the same financial support irrespective of whether they are studying at university or college.

As the loan system will now act as a lifetime draw-down account available to learners across all forms of tertiary provision, it will be necessary to place a ‘cap’ on the total amount of loan support available over a learner’s lifetime. A student studying an undergraduate degree followed by a PhD is currently able to borrow a total of approximately £75,000 in tuition and maintenance loans over the course of their studies. This sum therefore represents a sensible ‘cap’ for accessing financial support from the government over their lifetime.

Up to the £75,000 cap, the unified student loan system will operate with a single repayment threshold, repayment rate, interest rate and repayment period for all forms of tuition and maintenance loans that a learner requires. The repayment threshold and the interest rate should be reduced from their current levels and the repayment period should be extended.

The range of loans currently available from the SLC, and the variety of terms and conditions attached to each type of loan, is bewildering. It is much harder to explain and justify the student loan system to learners, parents and employers when there are so many different permutations of repayment thresholds, repayment rates and interest rates. This complexity is unnecessary and unhelpful in the context of building a coherent tertiary education system that supports lifelong learning. Up to the £75,000 cap, the single loan system will in future operate with one set of repayment terms and one interest rate for all forms of tuition and maintenance support that learners choose to draw down.

Selecting the right combination of a repayment threshold, repayment rate, repayment period and interest rate will require considerable thought and it is essential that this conversation is approached differently to how it has been treated in the past, when political considerations have typically dominated the discussion. Constant tinkering by successive ministers and governments has resulted in the repayment threshold for student loans rising from £10,000 to £25,000 – leaving taxpayers exposed to billions in additional unpaid debts each year.

Should a learner use up all their IEB funds, they will have to take out a loan to cover the remaining costs of their current course or programme as well as any future provision. This dynamic of significant up-front funding coupled with a supporting loan system contrasts with the current loan-dominated model. Unlike now, any decision by a learner to take out a loan after using up all their IEB funds will therefore be an active choice, not a necessity. In light of this change of emphasis, the government has every right to attach more stringent repayment terms to the loans seeing as learners will have, by definition, already used up thousands of pounds of government investment.

London Economics, a leading policy and economics consultancy, were commissioned for this report to assess the impact of different repayment thresholds and repayment rates on government finances. Following an analysis of the modelling by London Economics, this report recommends that the repayment threshold is lowered from £25,000 to £12,500 for all learners who open an IEB. This would reduce the cost of each cohort of students from £8.7 billion to £2.3 billion, with the RAB charge falling from approximately 46% under the current system to just 7%. Providing substantial funding of up to £20,000 for every learner through IEBs, accompanied by a clear expectation that learners should pay back their loans in full over the course of their career, is a much healthier and more sustainable proposition than the existing setup, where loans are rarely repaid and taxpayers are forced to pick up the resulting multi-billion pound tab. Even if the government selects the most expensive option in this report for IEBs (£3.4 billion), the saving of £6.4 billion generated by lowering the repayment threshold would comfortably cover this investment each year as well as any additional investment in IEBs for adults.

Another significant saving to taxpayers can be generated by adjusting the ‘repayment period’ over which graduates pay back their loan. It seems incongruous to have a repayment period of 30 years when most graduates are likely to be working for 40-45 years after they finish their degree. London Economics has previously calculated that extending the repayment period for student loans from 30 to 40 years would save the government £1.71 billion (under the current funding system) for each cohort of students. Consequently, this report recommends that the repayment period should be extended to 40 years to reduce the burden on taxpayers.

Once the loan system has been placed on a more sustainable footing, there will be no need for punitive interest rates designed solely to help stabilise government finances. The interest rate should be reduced from its current level of up to RPI + 3%. This report recommends that the government gives serious consideration to returning the interest rate back to the rate of inflation (where it still is for pre-2012 loans) so that the real interest rate is zero throughout the entire duration of each loan.

A significant proportion of outstanding student debt should be written off in line with what previous student cohorts would have theoretically received under the new system. Alongside this, all existing loans should be aligned with the new single repayment threshold, repayment rate, interest rate and repayment period over the course of 15 years.

It is important to balance the needs of learners who have already accrued debt with the SLC with those who have not and open an IEB instead. First, the government should write off a large proportion of each previous learner’s outstanding debt with the SLC in line with whichever funding formula is chosen for new IEBs available to young people. This could be done by, for example, using the residential postcodes supplied by learners when they originally applied for their loans to estimate their level of deprivation at the time. By doing this, all learners past and present will effectively be treated in the same way because it will be as if all learners had started with an up-front grant followed by using loans to pay the remainder of their costs/fees. Once this is done, all previous learners will now be able to access additional support up to the £75,000 cap.

Second, the government should incrementally align the repayment thresholds, repayment rates, interest rates and repayment period for previous learners so that over time they all match the single set of terms now offered to new learners. For example, the £25,000 repayment threshold could be reduced by, say, £800 a year for 15 consecutive years until it reaches the new threshold set by government in the IEB system. Similarly, interest rates should be gradually lowered so that they too become aligned with the more favourable 0% real interest rate offered to new learners.

This package of a generous loan write-off coupled with the new £75,000 loan facility and new repayment criteria should provide a mechanism through which the proposed single loan system can, in effect, be extended backwards to learners from previous cohorts. This is another important component of building one single loan system that is easily understood and accessed by learners of all ages. Careful modelling will be required to ensure the transition from the old loan system to the new repayment terms represents a fair deal for students.


The reason that this report is called ‘Free to choose’ is two-fold. First, by placing the control of the tertiary system (and most of the associated funding) in the hands of learners, they will now be free to choose the most appropriate course or programme for them and the government’s funding will follow their choice. Second, this report seeks to tilt the tertiary education system in favour of the most disadvantaged learners without unduly restricting the support available to others. Should a learner from a disadvantaged background open an IEB with £10,000-20,000 of funding, the cost of tuition for a huge swathe of courses across the tertiary system will be mostly, if not entirely, covered. This means that disadvantaged learners will be able to access many courses and programmes for free without even taking out a loan – something that is a distant prospect for almost everyone under the current arrangements. Ensuring that these learners are free to choose the right course for them without the prospect of a large debt burden hanging over them would be a laudable outcome in the broader pursuit of educational equity, even if the Augar Review had never been set in motion.

Crucially, a tertiary system that revolves around IEBs also meets all four criteria set out by the Prime Minister for the Augar Review: more informed choices and greater transparency about different education options; better value for money for students and taxpayers; a strong emphasis on providing the most financial support to learners from the most disadvantaged backgrounds; and promoting a greater diversity of provision, with the aim of reinvigorating part-time university and college courses as well as higher-level technical qualifications that are valued by employers. What’s more, the IEB model can be implemented regardless of any changes to tuition fees proposed by the Augar Review because IEBs are simply a vehicle through which the government provides funding for learners.

It is plainly apparent that the government needs to reduce the overall cost of tertiary education. The package of reforms described in this report can help achieve this without unfairly hindering any specific type of institution or group of learners. What’s more, even including the generous up-front investment in IEBs each year, the annual cost of operating the IEB model is estimated to be £6 billion per student cohort – a saving of £2.7 billion compared to the current system. This leaves plenty of scope to invest in adult learners in the coming years while also easing the financial pressure on taxpayers.

Every new funding model will inevitably encounter some challenges and obstacles as it is developed and implemented. Nevertheless, the framework described in this report for IEBs shows how a fair, sustainable and effective tertiary education system can be built using nothing more than the existing infrastructure, processes and procedures. As a result, it is hoped that this report makes a valuable contribution to the government’s post-18 review and the future of our education system.

MAY 2019