This blog has been kindly written for HEPI by Professor David Phoenix, Vice-Chancellor of London South Bank University (LSBU) and CEO of LSBU Group.
You would be hard pressed to find someone in either the higher education sector or Westminster willing to argue that the current funding system for universities is working well. The value of outstanding loans reached £182 billion in March last year. (By comparison, the current estimated cost of the entire Covid-19 vaccine rollout is £11.7 billion). At the same time, the unit-of-resource for teaching students is rapidly shrinking, with the £9,250 tuition fees now worth only around £6,600 in 2012/13 prices once inflation is factored in. And although the changes to the loan conditions coming in this autumn will increase the repayment term for graduates, generally there is little political appetite to increase the financial burden on students further by raising the loan cap.
It is somewhat inevitable then that the issue of a graduate tax has once again raised its head as a potential way of simplifying the entire process. While much ink has been spilt on both the positives and negatives of such an approach, I think one of the most compelling arguments against implementing such as system is to look at how other areas of our education system which are funded through direct taxation have faired – namely further education.
Much of the graduate tax argument to date has focused on the fact that spending on higher education will never be a priority for ministers when it is in direct competition with schools, hospitals and pensions. As of November 2022, though, I believe this discussion around the unit-of-resource has been overshadowed by the shift caused by the Office for National Statistics’s reclassification of FE colleges and sixth form colleges into the central government sector. This decision affects not only colleges themselves but any subsidiary bodies they might own – even if they are intended to be commercial in nature – by virtue of being controlled by a public sector body.
These changes are significant and mean that colleges, now being subject to the framework for financial management set out in Managing Public Money, can no longer take out commercial loans or financing – unless it’s shown to be more cost effective than borrowing from the government. This will no doubt raise questions about the ability of subsidiaries in particular to compete in commercial markets. But operationally, there will also be a range of additional controls, given the government effectively becomes responsible for the sector’s position in terms of profit and loss.
In the last month, a number of colleges have had to suspend negotiations with private sector lending partners as they can no longer seek commercial borrowing. Although the Government has committed to providing an additional £150 million of capital grant funding in 2023/24 to make up for lost commercial loan income for planned estate projects, this apparently hasn’t prevented Kendal College from having to halt their redevelopment to turn a disused shopping centre into a campus or East Durham College to pause their plans for a new multimillion-pound T-Level facility. In truth, even if the capital is available there is a question as to whether the Department for Education and Treasury have the culture, focus and appetite to be able to assess multiple commercial bids at pace, no matter how well-intentioned officials are. According to the Association of Colleges, at least 20 colleges sought borrowing approvals from the Department for Education in December 2022 alone.
In 2021/22, the total amount of Education and Skills Funding Agency (ESFA) funding for 16-19 learning was £6.6 billion. By comparison, the Student Loans Company currently loans out around £20 billion to approximately 1.5 million students in England each year. If that money were funded by direct taxation, it is difficult to see how a similar reclassification wouldn’t be on the cards for universities, which would present the sector with significant challenges given the reliance it has developed on private sector borrowing and commercial activity over the last decade. (In 2020/21 external borrowing represented 37.8% of aggregate English HE provider income.)
In reality, reclassification rests not simply on funding but an assessment of the ability of the government to intervene – which in turn would need consideration of the role of the Office for Students as an arm’s length body. The experiences of the further education section though suggest to me that those arguing for a graduate tax should be careful what they wish for – both in terms of the influence on the unit-of-resource and in terms of the potential impact on sectorial classification. While I would agree that the funding system needs review, we need to look more holistically at what we are seeking to deliver and then how the different aspects might be funded by a combination of Government grant, student loan and employer contribution rather than looking at each part in isolation.