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Lecture from America

  • 17 January 2019
  • By Peter Ainsworth

A guest blog kindly contributed by Peter Ainsworth, Managing Director of Equimatrix, and author of Universities Challenged: Funding Higher Education through a Free-Market ‘Graduate Tax’ published by the Institute of Economic Affairs.

2019 appears set to be a defining year for the Higher Education sector. After years of plenty following the 2012 increase in tuition fees to £9,000, the cycle shows signs of turning and years of famine may lie ahead.

The abolition of number controls has led to fierce competition for students at a time when the pool of 18-year olds is shrinking. Brexit threatens to reduce the flow of EU domiciled applicants. Economic slowdown in China will make that market more price sensitive.

Already there is talk of financial difficulties at a number of Universities. Building programmes financed by debt are clashing with restrained income. Universities owe nearly £12bn, sharply up from £5bn in 2012. In 2016-17, 19 universities were operating at a loss, against just six the year before. The new regulator, the Office for Students, provides little comfort. Michael Barber, its Chairman, made clear that he was interested only in protecting students, not institutions.

As if one unhelpful quango was not enough another, the Office for National Statistics, made an unfortunate decision – even if it was not unexpected. By determining that the expected 45% loss on student loans should count as a current capital cost, the government’s budget deficit will rise by approximately £12bn.

This does not augur well for the Augar review, due to report early this year, whose terms of reference require value for money for taxpayers. Trial balloons floated by the review suggested they were considering proposing a reduction in the maximum level of tuition fees. This would help with the Government’s deficit, but could be the final nail in the coffin for a number of already stretched institutions. Post the ONS ruling, the political appetite for now more visible HE spending is likely to be limited by the demographic fact of an aging voting population which cares more about health care and pensions than subsidising youngsters.

Grim as the outlook for English Universities may be, some comfort can be drawn from the observation that a similar problem faces US institutions. Student debt there has now topped $1.5 trillion. With a ballooning fiscal deficit flowing from Trump’s tax cuts the ratings agencies have warned that the US’s hallowed triple-A sovereign credit score could be at risk. In that environment, just as in the UK, funding of the higher education sector (typically via loan guarantees) is likely to come under pressure.

US institutions are aware of the risks and, unfettered by the dirigiste regime Universities face in the UK, some have started to innovate. For example, in 2016, Purdue University, a public research university based in Indiana, which was founded in the late 19th century, introduced a risk-sharing scheme whereby its own endowment funded students’ tuition fees in exchange for a proportion of their future earnings by means of an Income Share Agreement (“ISA”). Clarkson University in New York and Lackawanna College in Pennsylvania have recently begun similar schemes. The Economist wrote that it was believed another twelve institutions were due to follow shortly.

Just recently, the New York Times reported that Silicon Valley Venture Capitalists including Google Ventures, GGV Capital, Vy Capital, Y Combinator and the actor-investor Ashton Kutcher are now entering the field with $30 million funding for Lambda School, an online learning company.  Lambda is launching programmes where tuition is provided in exchange for ISAs and the initial funding round values the school at $150 million.

The investments will be used to turn Lambda into a multidisciplinary school offering short programs in professions where there are skills shortages, such as nursing and cybersecurity. Down the road it is envisaged that it could become a full-scale university.

This notion that there should be risk-sharing between student and University is not a uniquely American idea. Just last November, Johnny Rich, the head of Push, an outreach organisation, wrote in the HEPI publication: “Fairer funding: the case for a graduate levy” that post-graduation repayments “should be paid to the higher education institution where the graduate studied, giving the institution an incentive to ensure their graduates’ employability.”

This alignment of interests is the key to the appeal of the risk-sharing approach. By promising to deliver better employability outcomes it improves the financial viability of the sector. It also relieves the state of the burden of student loan debts, making it politically attractive in these straightened times.

UK Universities would do well to take note of this American lesson in innovation. The ease with which US enterprises can raise large sums of venture capital and implement projects rapidly could create a strong new competitor for global students surprisingly quickly. Rather than sit back and watch the Americans steal a lead, 2019 should be the year that UK Universities decide to take back control, and develop new funding models independent of Government.

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