In this blog post, the Director of HEPI, Nick Hillman, takes a first look at some new proposals on student funding from the Institute of Economic Affairs.
On 23rd October, the Institute of Economic Affairs (IEA) published Universities Challenged: Funding Higher Education through a Free-Market ‘Graduate Tax’ by Peter Ainsworth. It’s good to see one of the country’s most important and influential free market think tanks engaging with the knotty question of higher education finance.
The piece is an interesting read and, essentially, argues for a university-based loan scheme: ‘Universities should individually or collectively offer contracts to their students, who would agree to pay to the university they attended a given percentage of their earnings.’ Graduates would pay back sums sufficient to ensure a very low, or zero, default rate across an institution’s former students.
If we set aside the fact that indentured labour is unlikely to be legal, we can see that in wanting to put more some risk on universities, the pamphlet has much in common with other ideas floating around, such as David Willetts’s idea of selling some of the student loan book to institutions – although such similarities are ignored in the text. There is surely something in the author’s contention that, ‘Under current arrangements, universities focus on persuading students to enrol rather than on supporting their careers over the long term.’
There are five detailed points worth discussing on the proposals.
- The pamphlet takes it for granted that existing subsidies for students (eg the underwriting of student loans and HEFCE teaching grant for more expensive-to-teach subjects), which recognise the public value of higher education, are unwanted inefficiencies rather than design features. Little space is devoted to some pretty serious potential problems, such as the lack of any incentive in the proposed model to offer courses with high public returns but low private returns (nursing, say). The author does admit, in passing, that some intervention could continue to be necessary, but it comes across as an afterthought and is not explained: ‘The government – or local government – can meet specific social or economic objectives by subsidising selected institutions, courses or students. Whether and to what extent the government should do this is beyond the scope of this paper and the matter can be divorced from general considerations in relation to student funding entirely.’
- Perhaps unsurprisingly for such a purist think tank, the pamphlet is not well rooted in the present. There is only one paragraph on maintenance support, despite its importance in funding students, and the only individual institution given any room in the text is the London School of Business and Finance. Ainsworth argues that a university-based loan model is better than the current system of taxpayer-backed loans because ‘as a private sector contract under UK law, it would be enforceable all around the world.’ But this exaggerates the differences between existing student loan contracts, which are already enforceable abroad, and the proposed new model. It is remarkably difficult to get all outstanding loans back from people who have left the country, but that is more to do with the cost effectiveness of finding individual people living abroad and prosecuting them than on legal obstacles. Indeed, it is almost certainly easier for a national Student Loans Company to chase people living in other countries than for every higher education institution to be doing so on their own as the report envisages.
- It aims to transform the incentives of universities so that they focus only on courses with very clear positive labour market returns: where the labour market returns are lower, the pamphlet proposes that ‘courses could be predominantly online and inexpensive’. But this ignores the role of hierarchy and prestige in our higher education sector. The graduate returns of different courses are linked to the entry criteria and the prestige of institutions, not just the quality of courses. So there is a risk that the proposals could reinforce existing tendencies, rather than encourage diversity and initiative.
- Somewhat surprisingly for a free-market think tank like the IEA, the pamphlet aims to recover far more than the cost of their education from the highest-earning graduates. That can certainly be defended on grounds of progressivity, as those who do well in earnings terms help fund their those who earn less. But there are also problems with it: students who suspect they will earn a lot and thus have to over-pay substantially for their education can opt to pay their fees upfront in the IEA model, thereby avoiding any excess repayments; and, although it is ignored in the pamphlet, this experiment has been tried before with disastrous consequences. As I recently wrote in the Guardian, a not dissimilar plan at Yale in the early 1970s, known as the Tuition Postponement Option, failed miserably: ‘those who did well financially had to cover the costs of those who did not. The plan was scrubbed at the end of 2001 after an aeroplane salesman set up a “TPO Blues” campaign for rich alumni fed up with paying. Despite the loss of income, the President of Yale was relieved: “We’re all glad it’s come to an end”.’
- The model arguably takes insufficient account of gender. The current loan model, with its 30-year write-off period, can help people, often women, who take time out of the labour market because of caring responsibilities. The IEA model sounds like such people would be hounded: ‘The number of years over which repayments must be made should refer to years in meaningful employment, defined as years when income exceeds a hurdle level. This makes the repayment obligation fair between those who choose to work early and retire early, and those who choose to work late and retire late.’
It is, perhaps, a shame that the IEA have chosen to devise an entirely new undergraduate loan scheme rather than putting their logic to work elsewhere on higher education finance. No political party wants to tear up the undergraduate funding model that exists, but all are scrabbling around for solutions to the postgraduate funding problem for which the IEA model is a better, though still perhaps imperfect, fit.