13 February 2020

The debt-free alternative to university

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Expect skills to feature at the next Budget. Within government, boosting human capital is seen as a key part of their plan to ‘level up’ Britain.

It is likely to mean more funding for both FE colleges and early-years education. But it would be a mistake to assume tax-and-spend is the only answer. Innovative entrepreneurship has an important role to play.

In the US, Lambda School and General Assembly are testing a radical(ish) new model to expand access to high-paid jobs in software engineering and data science. Unlike most training programmes, students pay nothing up front and don’t take on student debt. Instead, they sign an agreement to pay back a share of their earnings (10-17%) once they’ve got a job earning $40-50,000 a year. The income share agreement (ISA) lasts for two years, and repayments are typically capped.

At this point, you might say, “tuition fees, you’ve invented tuition fees”. It’s a fair cop. In England and Wales, student debt isn’t really debt. In principle, it’s equivalent to a capped graduate tax. But there are key differences.

First, ISAs are a private sector solution and don’t rely on subsidy from the public purse, unlike university education. According to the Institute for Fiscal Studies, for every £1 in student debt loaned the state pays 43p (and for Scottish students tuition is entirely taxpayer-funded).

Second, Lambda School and General Assembly only get paid if students get good jobs on graduation. They are incentivised to invest in after-graduation careers support, in some cases building partnerships with large employers. By contrast, universities get paid regardless. Graduate employability might matter for league table performance, but If graduates don’t go on to earn decent salaries and pay back their student debt, it’s the Treasury that suffers financially, not the institutions.

There is a growing acceptance that formal training routes are no longer sufficient. There needs to be more competition and flexibility.

However, the Government is understandably reluctant to subsidise private sector providers. For instance, while there might be a case for letting individuals take out student loans to attend coding bootcamps, past tax breaks for self-funded training have ended up subsidising hobbyists. As a result, any support for private training will typically come with strings attached, with the extra regulation creating barriers to entry and reducing flexibility.

ISAs could fund a wide-range of training programmes without requiring state involvement. Coding courses may be a low-hanging fruit, but the income-sharing model could work for most forms of vocational learning.

This all prompts the question: if ISAs are such a good idea, why don’t we have them already? The problem is regulation, or the lack of it. There is currently no bespoke set of rules for ISAs. Instead, the Financial Conduct Authority clumsily treats them as credit agreements (which they are clearly not). This one-size-fits-all regulation creates two major problems.

First, the organisation offering the agreement has to state a representative APR. This frankly doesn’t make sense in the context of an ISA, because the ‘repayments’ depend on future income. One company got around this by presenting three ‘illustrative’ rates – a high, medium and low – to give the ‘borrower’ some indication of potential costs. But that’s a fudge which relies on the regulator’s discretion.

Second, by law you have the right to pay back a credit agreement early, with no penalties. ISAs work on the assumption that some people will pay back more than the course costs to cover for the people who inevitably pay back less. Allowing early repayment breaks that model. There are workarounds but they’re imperfect.

If regulators can fix these problems (and there’s no reason why they couldn’t), then it might create a whole new industry. We’ve seen this happen elsewhere, with the FCA’s forward-thinking approaches to fintech, peer-to-peer lending, and crowdfunding spurring on countless startups and making the UK a world leader.

We have a chance to do the same and be at the forefront of equipping people with the skills to thrive in the modern economy – and all without being saddled with debt.

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Sam Dumitriu is Research Director at the Entrepreneurs Network