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“The higher education funding system is unsustainable” – oh, really?

Mike Boxall

Research Professional

18 September 2014

A shorter version of this article first appeared in HE Research Professional

“The current system for funding higher education is unsustainable and urgently needs fundamental reforms.”

Statements to this effect have become commonplace over recent months, most recently from the President of Universities UK  and the Commons committee on business, innovation and skills .  Others including, unsurprisingly, the new Minister for Universities and Science  beg to differ, invoking the Director of Education at the OECD  who this week declared that “the UK is one of very few countries to have figured out a sustainable approach to higher education funding.”  So who is right?  

When we look, it quickly becomes clear that “sustainability” means very different things to different protagonists in this debate.  There are four broad threads running through the plethora of criticisms.

“Fees and loans have made HE unaffordable for poorer students”

This argument suggests that students’ liability for fees of £27,000 or £36,000 (no students sign up for just one year), translated into a debt burden of £50,000 or more, will make a university education unaffordable, especially for students from poorer backgrounds.  But there is little if any evidence of this happening.  On the contrary, students recognise that HE is still free at the point of delivery, and that the monthly cost of post-graduation loan repayments is about what many happily pay for their smartphones, at least for their first few years of employment.  The buoyant demand for university places, and indeed rising demand from disadvantaged groups , belies gloomy forecasts of price- or debt-deterrence.

“The cap on fees is inadequate to cover the costs of good teaching”

This is the lament of many vice-chancellors, amplified by observations that inflation is already eroding the value of the £9,000 cap set in 2011.  The strongest expression of the argument has come from the Vice-Chancellor of Oxford University , who claims that their ‘true’ costs of undergraduate education are nearer £16,000 a year.  What these proponents overlook is that the £9,000 fee cap actually represented a substantial windfall gain to universities compared to the previous regime of grants plus top-up fees.  It is moreover still topped up with grants for more expensive courses.  This windfall has been reflected in unprecedented rises in sector-wide and institutional revenues and surpluses.  These gains persist, although the benefits are being fast eroded by rising spending on staff costs (especially REF-able researchers) and new buildings.  It is true that tuition fee income has to go further than before, to cover costs of capital, development and contingency, but many institutions are actually doing very nicely  from the new regime. 

“The loan system will cost taxpayers more than the regime it replaced.”

This view is based on the arcane Government accounting treatment of the shift from direct grants to subsidised loans, through the Treasury’s Research Accounting and Budget (RAB) charge.  The RAB is a highly complex guesstimate of the value of future repayment streams from student loans, set against the current borrowing that funds them.  On the latest estimates from BIS and others , this charge is equivalent to 45% or more of the loans issued, which in public expenditure terms appears to be greater than the previous costs of the grant plus top-up fees regime.  But this conclusion does not compare like with like.  Grants represent real taxpayers’ money, spent now.  The RAB charge represents a complex mix of assumptions about deferred receipts, earnings expectations, discount rates and repayment profiles for millions of students over decades to come .  The actual Exchequer outlays to sustain student loans year on year will be different from, and quite probably much lower than today’s RAB charges.

“The apportionment of costs, benefits and risks is unbalanced and counterproductive”

Put crudely, the current funding mechanisms place the benefits of fee payments primarily with providers, the costs of loan repayments mainly on graduates and the risks of non-repayment firmly with government and tax payers.  Critics claim that this apportionment is unsustainable in that it encourages unwanted behaviours, especially institutions’ commitment to graduate employment.  Former higher education Minister, David Willetts , is among those arguing that universities should bear more of the responsibility and risks for the career success of their graduates.  He has proposed that institutions be encouraged to buy in to the student loan book and so to have a material stake in the repayment performance of their graduates.  Willetts’ particular proposition has been criticised  as impractical and potentially distortive, but the underlying principle may still have merit.

So, the evidence suggests that three of the four purported failings of the current fees and loans system are, at best, unproven.  Aspiring students are proving willing and able to afford their loan commitments, the feared RAB ‘time bomb’ looks increasingly like a damp squib, and plenty of institutions are managing to provide high quality education and make reasonable returns at current fee levels.  

Before we get too Pollyanna-ish, there are many aspects of the current funding systems that can and should be improved.  As the Select Committee and National Audit Office  have observed, the performance of the Student Loans Company (SLC) in collecting outstanding loans, especially from EU students, has been inadequate.  Notwithstanding the comments above, the lack of indexation of the fee cap will become a real issue within a few years.  And the lack of decent funding options for part-time and post-graduate students remains a gaping hole in the system.  All of these, however, can be remedied without root-and-branch system reforms.

The criticism that won’t go away so easily is the unequal apportionment of risks between institutions, students and taxpayers, and in particular universities’ lack of material (as opposed to reputational) interests in their graduates’ long-term career success (and hence loan repayments).  David Willetts’ idea of giving institutions a stake in ‘their’ portion of the student loans book would be highly complex and require primary legislation.  A simpler solution might be to introduce a contingent element to universities’ fee receipts, withholding a percentage of the upfront fee payment from the SLC to be released against improved performance in student satisfaction, completions and medium-term (say 3-5 years) graduate employment outcomes.  While fiscally motivated, a measure on these lines could transform the flawed relationship between universities, students and employment success, which is a much greater threat to the sustainability of the current HE system.

Mike Boxall is a higher education expert at PA Consulting Group

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