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HEPI publishes response to the government’s proposals for higher education funding

  • 11 November 2010

HEPI analysis published today (11 November 2010) provides a summary of the differences between the Browne Review and the government’s proposals; considers whether these proposals meet the two main objectives of reducing public expenditure and improving university teaching by increasing student choice; and examines the claim that the repayment scheme is progressive.  The report is available online.

Briefly, HEPI’s conclusions are:

  • In essence, the government has accepted the Browne committee report. There are a number of details where it has varied the Browne recommendations – for example there is to be a fee cap of £9,000 and no levy, but these are details.
  • In particular, the broad philosophical and ideological thrust has been accepted – that the state should not – unless exceptionally – fund universities directly for providing teaching, but that the market, as manifested through student choice, should be the determining driver.
  • And overall, the approach of the government, and of Browne, maintains the most progressive elements of the present arrangements, in particular that higher education should be free at the point of use, with governments making loans to students in order to enable them to pay the fees, and that repayments should be income contingent. Indeed, although the new proposals increase the total amount of student “debt”, they make month-to-month repayment easier by increasing the threshold for repayment from the present £15,000 to £21,000. Effectively, they reduce the monthly repayments and increase the period over which repayments are to be made.
  • Will the proposals reduce the public contribution to HE? This was a key question HEPI asked in HEPI Report (49) analysing the Browne Review recommendations. Now with BIS publishing a detailed explanation of what they did, including the simulated data set, HEPI has been able to explore alternatives – at least for a standard three year full-time course (an unprecedented level of openness on the part of government which should improve the level of debate).
  • In cash terms the proposals will increase public expenditure through this parliament and into the next. The more difficult question is what will be the long term cost of these loans, and this in itself hinges on the value of the repayments that will be received – which is determined by the cost to the government of subsidising the loans, measured by the Resource Accounting and Budgeting (RAB) charge.
  • To calculate the RAB it is necessary to estimate in detail what the earnings will be in 30 years time of students leaving university today and tomorrow. In the time available HEPI has not been able to do that. On the other hand, what HEPI has been able to do is to examine in great detail what the government and the Browne committee have done, and HEPI’s conclusion is that they have made hugely optimistic assumptions – for example that in real terms the average salary of those who graduate today will be £100,000 in 30 years time. They have also wrongly calculated male and female graduates as being roughly equal in numbers, whereas the reality is that there are many more female graduates than male (which matters, because on average female graduates earn less than males). Nor have they included any assumptions about whether EU students are likely to repay their loans (the idea of persuading Bulgarian graduates of UK universities to repay seems highly dubious). Nor have they included in their calculations the more than 25% of former students who will graduate without a qualification (and there is evidence that such students have poorer prospects than those who did not go to university at all).
  • HEPI has not calculated an alternative to the government’s assumed RAB charge – to do so would mean making a huge number of assumptions about earnings profiles of different groups and so on. Instead, HEPI has calculated the RAB charge that would mean that the government makes no savings from the new arrangements but on the other hand incurs no cost either. HEPI calculates that figure to be 47%. HEPI also shows what assumptions need to be made in order for the RAB charge to be as high as 47%. It takes only relatively small adjustments in assumptions about future earnings to increase the RAB charge to this sort of level. HEPI’s conclusion is that these arrangements are as likely to cost the government money as to save money. The main reason they are so expensive is because of the increase in the threshold before which repayments have to be made, which is an extremely expensive concession.
  • HEPI’s other main conclusion is that £9000 will in due course – perhaps not immediately, but it will not take long – become the going rate for fees. Given that there is such a large subsidy from the government, it makes perfect sense for universities to charge as much as they can – if nothing else they will be able to give large bursaries and scholarships to students which will be heavily subsidised by the government. And there are good reasons why students will – no doubt reluctantly – be willing to pay such high fees. On the other hand, HEPI’s judgement is that the new arrangements are more progressive than not, since significant numbers of the lowest earning graduates will, because of the raise threshold for repayment, pay less than they have in the past.
  • Will the quality of teaching be improved? The government has made clear that the motivation for the changes to HE funding and student finance was not just to reduce public expenditure, but to drive up the quality of higher education by increasing the freedom of universities and allowing money to follow student choice. The belief in the market – and reliance on student choice (through effectively the introduction of a voucher system) and the resulting competition as the sole expression of the market at work – as the primary mechanism to drive up quality underpins both Browne and the government’s response. For this market to work effectively, both Browne and the government call for much better information to be published to inform student choice – but even with this information, it will take a great deal more to achieve good market conditions in HE with students continuing to select their institution for reasons that are often good ones but which do not follow economic orthodoxy. Moreover, greater competition and responsiveness to student choice could easily be achieved through a change to the present method for distributing the block grant rather than shifting funding from grant to fees.
  •  What is the response of the government likely to be when it discovers that far less money is coming back than had been assumed, and that part of the reason for this is that £9000 has become the going rate for the fee? The report suggests that a number of approaches are available that will make the arrangements more expensive for the student (reducing the repayment threshold in real terms, increasing the interest rate, increasing the “tax” from the present 9%). One option that is not discussed in the report is that the government may simply shrug its shoulders and walk away, leaving it to universities themselves to make arrangements for student finance and support with whatever fees they can raise from students.

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