Student Loans and the Mind-forged Manacles of Privatised Keynesianism

Student loans are in the news again. Chancellor Rachel Reeves’ decision to freeze the repayment threshold of Plan 2 student loans for 3 years after April 2027 has caused an uproar among students who will now face higher repayment costs. This only adds insult to injury for those who borrowed from the government’s Student Loans Company between 2012 and 2023. As it stands, the vast majority of students will already be unable to pay back their Plan 2 student loan before the 40-year cutoff date, at which point their remaining sum will be written-off. Indeed, with a compounding interest rate easily reaching over 6%, many see the loan as more like a regressive 9% income tax for graduates. The more a student earns out of university, or the wealthier their family, the quicker they will be able to pay off their loan and the less they will have to pay overall. As public childcare services for working women remain underfunded throughout the country, these inequalities are inevitably gendered.

This renewed attention on student loans has revived a familiar set of perspectives on the issue. Some see student loans as a scam perpetuated by the government, as students are increasingly forced to go to university to remain competitive in a graduate labour market which demands applicants have a degree, any degree, but doesn’t seem very keen on hiring them. Others believe that students should bear the cost of attending university, given they are supposedly the primary beneficiaries of higher education. In this light, the growing number of students attending university has led many to frame the issue of student loans as a struggle between the student and the taxpayer. Making university free for students at the point of use, we are told, would force the government to raise taxes, a position that would naturally be opposed by those who did not attend university, but would then be forced to pay for those that did. 

As the Chief Economics Commentator at the Financial Times Martin Wolf puts it: “This controversial outcome is the result of an imperfect effort to solve an extraordinarily difficult set of problems, namely, how to finance the expansion of tertiary education in the UK in a fair and fiscally manageable way, while preserving the institutional independence and academic excellence that had made it highly regarded.” He added that, with regards to imposing university fees on students at the turn of the millennium, “It was politically impossible to obtain the needed resources from the general taxpayer alone.”

Perhaps counterintuitively, however, the current system of student loans puts more of a strain on the government finances than the previous grant model. Today, outstanding student loan balances total £292 billion pounds, a figure which is expected to rise to £500 billion by the 2040s. As long as these outstanding payments remain within their repayment thresholds, they will be considered ‘financial transactions’ and will not count against the public deficit. It is only when the government writes off these loans once the time limit for repayment has been reached that the outstanding amount contributes to the government deficit. It is currently expected that roughly 40% of the value of student loans issued since 2012 will be written off, with around 88% of former students expected to not pay back their student loan in full. As the economy continues to stagnate, unemployment grows, and a larger proportion of outstanding student debt is forced to be written-off by the government, individualised spending on higher education starts to look less like an easy way to reduce fiscal pressure on the government, and more like a ticking time bomb.

Faced with this prospect, successive governments have rubbed their heads together and come out with the brilliant policy response of making students shoulder more of the burden. Indeed, Rachel Reeves’s policy of freezing repayment thresholds is merely the age-old tactic of exploiting fiscal drag for the purposes of pushing more graduates over the repayment threshold. Naturally, nobody is buying it. Why, then, does the Labour government insist on pushing the matter? Beyond a lack of political will and imagination, I believe that answer lies in their inability to question the core tenets that underpin the current paradigm of economic thought; fiscal restraint and privatised Keynesianism.

As the welfare state was scaled back in many developed countries over the last decades since the end of the 20th century, the burden of achieving subsistence was passed from the state into the hands of private individuals. Where under Keynesianism the state took on debt in times of hardship to stimulate the economy and support the basic welfare of its citizens, the same logic is now applied to individuals who must take on debt to support themselves and their families. During the COVID-19 pandemic, for example, over 10 million Brits were forced to borrow money to stay afloat (p. 239), whether through credit cards, bank overdraft, or high-cost credit. 

This dynamic often intersects with the idea of asset-based welfare or financialization, where individuals are increasingly forced to rely on financial investments for what the state had previously offered as a public good. This includes pensions, student loans, and a general sense of financial security. The significance of such a shift, and the precarity of the current status-quo, was made clear to millions in late 2022, when the financial market reaction to Liz Truss’s mini-budget threatened to wipe-out their pensions and future financial stability within seconds. The winners here, of course, are the financial institutions who are able to profit from the underclass of perennially indebted individuals. 

Returning to the justification for student loans on grounds of fiscal prudence, it seems the government is stuck. The current system is primed for implosion, but returning to a system free at the point of use would add around £11 billion to the government budget which somebody has to pay. However, this dilemma, like every policy dilemma, is only so if you accept its framing.

As in double-entry bookkeeping, one individual’s liability is another one’s asset. In the same way, when the state is in deficit, that necessarily means that somewhere else in the economy the opposite benefit is felt. As the issuer of its own currency in sovereign space and resultantly the most stable entity in the economy, the state is best placed to finance whatever venture it feels the nation will benefit from most, without needing to fund it through taxation. For example, by making university education free to reduce economic inequality and support university research. Indeed, this exact logic was used to bail out and provide security to the banking sector after 2008, where the vast majority of the money created by the Bank of England ended up raising the asset wealth of the richest in society to the benefit of very few people in the broader economy.

It is one of the great tragedies of neoliberal economic orthodoxy that money creation is only seen as permissible when done by banks in the creation of loans, or by the government to reassure the banks when they make one too many risky loans. Of course, you would expect this to be the case given the political implications of the government realising its economic power. It would no longer require financing from financial markets, its citizens would no longer require the services of financial institutions to get by, and businesses would no longer be able to use unemployment as a way to discipline their workforces.

The student loan debate is, therefore, a symptom of a much broader issue. At its core lies a collective inability to shake off the economic orthodoxy that views public deficits, and the state more broadly, as a threat to the functioning of the economy. In fact, without state investment in higher education and research, the productive potential of inventions such as the internet and cellular technology may perhaps never have been realised. Beyond such crude economistic justifications for the support of higher education, however, knowledge and exposure to ideas are goods in themselves. The process of learning and critical engagement is an end in itself, regardless of its practical applications. Sadly, there is no easy way to mathematically model such a thing so the economic growth argument will have to do.

Image: Flickr/Charlie Owen

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