A lever long enough to move Britain
Open HMRC’s student loans infrastructure to any institution and any learner
This essay was written as a submission to the TxP Progress Prize.
Starmer has committed to reaching for the ‘growth lever’. A fast, high-impact option is to open HMRC’s student loans infrastructure to any institution and any learner.
We need hundreds of thousands of skilled workers to build the housing and infrastructure that are needed to reduce the cost of living. Our infrastructure across the board has not kept up with population growth, let alone with the demands of net zero by 2050.
We do not have the ability to train this many workers as quickly as we need to. There is already a shortage of construction workers for our limited ambitions and those that we have are old. The trade press says that a million more workers are needed over the next 10 years. A third of skilled labourers are over 50, and only 9% are under 251. The workers that we do have can’t access the training they need to become more skilled.
Over 2021-2022 I interviewed ~200 construction workers about the barriers they faced to training. TL;DR, people on low wages could not afford several thousand pounds for a qualification plus the living expenses while studying, and apprenticeships were not available for most of the people I spoke to.
Employers weren’t training more people because it’s a risk: higher skilled employees demand more money, so training costs both the input costs and the higher wage to prevent the employee from leaving. For a lot of companies it’s not worthwhile, which at scale makes everyone poorer.
These are workers with tacit skills, the kind where employer-based training works well. Indeed, in Germany there is a much greater culture of staying with the same organisation and of being rewarded for doing so — consequently there is a lot of workplace training. We do not have those social technologies in the UK, but we might be able to replicate them with a specific financial technology: income sharing agreements.
Income sharing agreements
An income sharing agreement (ISA) is a contract in which the graduate states ‘I will pay you a% of my income above £b for c years’. It is not a Student Loan: the most important part of an ISA is that the training institution bears risk on the income of the graduate, and for it to maximise its own income, it must maximise the income of the learner.
The terms for the government’s student loans are the same between every institution, course, and candidate, which removes the whole point of using an income sharing agreement.
There is only one provider of private ISAs: Stepex provides ‘Future Earnings Agreements’ to a number of universities and bootcamps. They provide some of the upfront capital and split the earnings with the institution, but hey are expensive because they have no economies of scale, face no competition, and deal with the risk that the graduate will not make their payments. They are mainly used for short-term, high-cost bootcamps that significantly and reliably increase a graduates’ pay.
To be useful for construction, they would have to be much cheaper. These would allow an employer to make money off of training their workers whatever happens. If the worker stays after training, they reap the rewards of a more skilled workforce. If they leave, the ex-employer gains the income due to them for training. Workers gain training they could not afford upfront, and employers hedge their risk.
Pre-built infrastructure
HMRC has built the largest infrastructure for income sharing agreements in the world, to operate student loans. They already handle over £200bn of loans from over 160,000 repaying borrowers. Preventing private use of this national infrastructure is like banning private traffic from the M1.
There are two massive benefits of using this infrastructure versus a private provider: their economies of scale reduce the cost of operating the agreements, and it eliminates the risk of non-payment as the repayments are collected by HMRC.
HMRC could give every person the ability to make an ISA worth up to 15% of their future income above minimum wage with any counterparty. An ombudsman and reporting requirements should reduce the risk of bad actors. Requirements should not be onerous as the aim is to minimise the cost of the agreements.
Simply opening access would be enough to create the cheap, reliable ISAs that would give employers confidence to train workers more. A natural equilibrium will form, because if demand for workers spikes, employers will spend more time training their junior staff, as they will be able to make more money off of their future income. If it slumps, they will spend less time training.
Financiers can help: if they expect that demand for electricians, say, will rise, then they can invest in training electricians through ISAs. The training provider/workplace gets some money upfront to deliver the training and splits the returns with their investors.
Beyond electricians, if a person has a tradition of knowledge, ISAs allow them to capture value from disseminating it. Some of these traditions can be very valuable: the startups that came out of Paul Graham’s educational institution, Y Combinator, generated over $50bn in revenue in 2022. Their investment is similar to an ISA, because at that stage they are investing in the founders, not the company.
Cheap ISAs allow anyone to pass on the tacit knowledge they have acquired, however is most effective. A learner could choose to give their 15% to one person, to mentor them over several years; to a collection of thousands of specialists who pool the ISAs of thousands of students; or to any kind of institution in between. Open ISAs are a way to fund a million educational experiments wherever there are gaps in what we have now. Some could succeed to the level of YC.
The Treasury view
The Treasury should be very happy with opening ISA infrastructure because they get to make a lot of training happen with little government money. It also gives them a price signal to follow if they decide that a market price is not socially optimal.
HMT is familiar with using the financial system to accelerate markets it likes -- for example S/EIS investment tax relief, the British Business Bank, and the EMI Options Scheme are targeted support for the startup ecosystem. Open ISA infrastructure would give HMT comparable ways to increase the amount of training beyond the market equilibrium.
Never waste a crisis
Student loans don’t seem to be working. They are expensive to the taxpayer, hated by graduates, and obviously haven’t succeeded in growing the economy.
Something will need to be done. A proposal like this can be launched loudly or silently and it can be fully live in the first 100 days of Starmer’s premiership.
By the end of his first year, he will be able to talk about the massive number of new workers who have entered training, ready to rebuild our infrastructure, hit net zero by 2050, and grow our economy.
By the end of the decade, we’ll see the effects of a few institutions passing on incredibly valuable traditions of knowledge.
2019 ONS data, including occupations 52: Skilled Metal, Electrical, Electronic Trades, 53: Skilled Construction And Building Trades, 81: Process, Plant And Machine Operatives, 82: Transport And Drivers And Operatives
Image credit: The future (Steve ChinHsuan Wang), via Unherd