- This HEPI blog was kindly authored by Jeff Frank, Professor of Economics at Royal Holloway, University of London and Norman Gowar, Professor Emeritus at the University of London.
HEPI has published the third version of its analysis of the economic benefits of our universities hosting overseas students. It finds a substantially increased gross benefit, £41.9 billion, to the UK economy arising from the 2021/22 cohort. This is associated with a rise in overseas student numbers of 40% in the last 3 years. Universities UK reports that international students make up 23.8% of the total student population in 2021/22 (15.1% of undergraduates and 45.4% of postgraduates). This is not evenly distributed across subjects, with 46.2% of business and management students from overseas. Further, it is not evenly distributed across universities. For example the Complete University Guide shows percentages of first degree students as high as 54.3% at UCL, putting home students in the minority.
The growth in overseas student numbers is not a result of an altruistic view that it is a good thing for the country in terms of future overseas influence. Solely or at least primarily, universities have recruited high fee overseas students as compensation for perceived insufficient funding for home students. The Guardian reports on the dependence of universities upon overseas student income. The concentration on subjects such as management and upon two countries (China and India) raises questions about over-reliance on potentially risky sources of revenues. Recent government proposals for curbing immigration add further uncertainty.
Much of the discussion has centred on the idea that British students are being squeezed out by less qualified (but higher-fee paying) overseas students. Consistent with this hypothesis, the Financial Times reports that non-EU students get lower degree outcomes.
The fee differential between home and overseas students, and across degree subjects, is substantial. UCL, for example, not only has a high proportion of overseas students, but charges them high fees. The overseas fee at UCL in 2023/24 is £37,500 for Management Science, £32,100 in Economics, but ‘only’ £26,200 in English. Nearby City University charges £24,500 for Business Management, £20,860 for Economics and £18,670 in English (although, unlike UCL, it doesn’t fix the fee for the full degree).
When home fees were introduced with a cap of £9000 in 2012, the authorities, against advice, expected universities to set different fees to compete in an open market. Interestingly, without a cap, universities are competing in the overseas student market by setting higher or lower fees.
We feel that insufficient attention has been paid to the ethics of charging higher fees to overseas students. These fees (and similar residency-based differentials) are exempted from the Equality Act 2010. It might be argued that the differential reflects taxpayer support for university teaching of home students. However, with the 2012 reforms, the bulk of support to home students lies in the forgiveness component of the income-contingent repayment loan scheme, and not in direct subsidies to universities for teaching. The additional direct costs incurred by a university for an overseas student are likely to be modest. These could involve support in English language learning and in adjusting to a new social and cultural environment. They are likely to run to £1000 or £2000, not the differentials of up to £20,000 seen in some courses.
Economists have studied this sort of price setting as ‘monopolistic competition’, set out in 1933 by Joan Robinson in the UK and Edward Chamberlin in the US. In setting the overseas student fee, the university may raise it to the level where it becomes self-defeating. At a certain point (which differs by the ‘desirability’ of the university and the course), a higher fee deters enough students for revenue to go down. In the university setting, the qualifications of the student also matter – as a university raises its fees, the better qualified overseas students have more options and they are the ones who go elsewhere. It is little surprise that the top universities have more market power and set higher fees. It is perhaps the case that the badge on the degree, irrespective of the undergraduate experience is of even more importance for overseas students than it is for home students.
The result of all this – along with the freezing of home fees at £9250 – is that some universities are doing extremely well financially, while others are at the verge of bankruptcy. This is associated with the high level of indebtedness taken out by universities as they sought to compete for students by building programmes and increasing the size of university management.
To sum up the problem, some of the most attractive universities are admitting high percentages of overseas students at the expense of home students. Since much of this money is going into maintaining internationally outstanding research, it is not without benefits to the sector and the UK as a whole. But it has clearly got to the point where the education of and opportunities for home students is being affected. On the other hand, less prestigious universities are finding it hard to compete and – with the associated financial stringency from the frozen home fee – are not providing the best possible education for home students.
We think the solution is provided in the original Browne review. Unlike the government, it seems, Browne knows something about how markets work. Browne proposed a system (for home students) where each university could set its fee levels, but a levy would be charged for fees above the standard level of £6000 (about £9000 today allowing for inflation). The levy would start at a marginal rate of 40% but rise up to 75% for fees of twice the standard level.
Our proposal is to adopt the Browne levy for overseas student fees. Scaling up by inflation, at current fees of £24,000 at well-positioned universities, and using Browne’s calculations, 73% of the revenue would remain with the recruiting university. The remaining 27% could go into a common pool and be re-distributed per capita with home student numbers. This could be targeted towards non-traditional home students in a more effective widening participation scheme. The per capita rebate to universities could operate like the pupil premium in schools. We envisage that the top universities would be eligible for the rebate scheme. This might seem perverse but it would reduce the home/overseas margin and soften the incentive for overseas recruitment at the expense of home students.
With this scheme, the ‘profit’ on an overseas student is being taxed, and some top universities would shift back to having more home student places. The redistribution means that less well-placed universities (in the scramble for overseas students) would find their unit resource per home student has gone up, but at no cost to the taxpayer.