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Weekend Reading: What to do about university funding?

  • 20 April 2024
  • By David Willetts
  • HEPI recently published a collection of essays on the issue of funding undergraduate degrees, curated by HEPI Director of Policy and Advocacy Rose Stephenson. Over the next few weekends, we will be running select chapters from that collection as Weekend Reading.
  • This chapter was authored by David Willetts, Minister for Universities and Science from 2010 to 2014 and author of A University Education (2017).

Our universities face a funding crisis. Fees of £9,250 are not sufficient to cover the costs of delivering higher education to the typical student. But many people, including many policymakers, do not believe this. They think it looks like quite a lot of money for modest contact hours and limited numbers of lectures. So, the first thing universities need to do is to be as transparent as possible about the costs they face.

Approximately £1,000 of the fee goes on mandatory access arrangements – this funds access and participation work in institutions. The other stages of education have separate capital grants from government, for example for building projects. However, I vividly remember the Treasury doctrine that tuition fees would have to cover the interest costs of borrowing that universities would need to fund any capital projects; so that is another use of the fee income. And although they are called ‘tuition’ fees they are really university fees covering everything from the cost of the sports facilities to burgeoning mental health facilities.9

Explaining these costs is the first step.

The next step is to explain that the Resource Accounting and Budgeting (RAB) charge – the rather speculative forecast of loan write-offs in 40 years’ time is not cash available to be spent today: there is no stash of money here to solve the sector’s financial problems. That then opens the question of what should be done about the system. There are calls for a new model of university funding. But they must engage with two basic truths of university funding.

First there is little political support for increased public funding of higher education – apart perhaps for bringing back some means-tested support, in the form of maintenance grants, and increases to the teaching grants for high-cost subjects, both of which would be a great help.

Even within the education sector, many colleagues favour increasing funding for other stages of education over higher education. I have been at education conferences where students outside call for free university education while all the experts inside say we should prioritise early years. I happen to think this argument rests on exaggerated early years determinism and underestimates our capacity to learn and change later, but it is the conventional wisdom and completely cross-party – from Andrea Leadsom to Bridget Phillipson.

Secondly, graduates earn more than non-graduates. There are interesting arguments about why this is – signalling (that a degree acts as a sign to employees that a graduate has the level of skill and knowledge they are looking for), selection (that by being accepted to university, the graduate must hold some of the attributes the employer seeks) and investment in human capital (that the skills and knowledge gained during a degree makes graduates more employable than non-graduates). And there may be some decline in the graduate premium. But it remains the case that on average graduates earn more than non-graduates, so expecting graduates to pay back for their higher education is fairer and more progressive than expecting the generality of taxpayers to pay.

However, if students had to pay upfront, as many do in the US, then we might deter young people from going to university. Instead, we should fund them first and then expect them to pay back if and when they can afford to. This is a sensible midpoint between a full market model and getting back into public spending and taxation. It is the model we have had for over 20 years now and I see no better alternative. Indeed, it is quite delicately balanced to avoid the twin perils of either moving to a commercial system or public spending. If it were commercial and regulated as a financial service, then, for example, the ‘know your customer’ regulations would require assessment of individual creditworthiness and make it difficult to offer loans to students unlikely to pay back. If you break the individual payment model, then you lose the contract to deliver a service and are back with tax and public spending which condemns the sector to longterm decline and quite possibly further controls over borrowing and pay. I was often told universities were a public service and should be funded as such but the advocates of that were not so keen on the consequences of Treasury control.

A full-blown graduate tax would certainly bring higher education back into tax and public spending. But that is not the only problem. It means what it says – you pay more tax because you are a graduate. I find that hard to defend – indeed a tax system which identifies a particular personal characteristic or attribute and then taxes your income is very unusual indeed for any liberal democracy. I can understand two people working side by side for the same pay but one having a deduction from some of her earnings as she is paying back for the cost of her university education. But I cannot understand such a deduction just because she is a graduate. That is not just wrong in principle it is also wrong in practice, especially as we now have clearer knowledge of courses and universities leading to higher earnings. Studying Economics or Law or Medicine at a prestigious university would mean a lifetime of higher tax payments way above the actual cost of your education. That creates a real incentive to study abroad. Suddenly American universities do not look so expensive.

The fees and loans model is therefore delicately positioned between two unpalatable alternatives of full commercialisation or entering the public sector. Extremes of the individual and the collective. It is a microcosm of so much British political economy balanced between the individual and the collective.

The criticism of many areas of public policy now is the endless churn of new policies. But the basic higher education model has not changed much for over 20 years. There is no alternative model to replace it. But the real problem with the current system is that it has got completely fossilised. I believe there should be a quinquennial review when all the variables in the system should be looked at to see if they should be reset in the light of economic changes.

There are some obvious issues to consider. What is the cost of delivering higher education? What is happening to average wages? What proportion of loans are being written-off? Should the repayment threshold be adjusted in the light of changing earnings or repayments? What is the right period for repayment – should it be a lifetime loan and a charge on the estate? Is 9 per cent the right rate? Could there be a raked set of rates, say 3 per cent, 7 per cent and 9 per cent but does that collect enough? Is it right to charge interest on the loan and if so, at what rate? And of course, do students have enough to live on at university? Are cuts in their maintenance funding leading them to do so many hours of paid work that their studies are affected?

The quinquennial assessment should cover all graduates. That would help protect another flexibility in the system which is in danger of being lost. There is a misplaced fear that it would be retrospective to change the repayment terms of existing graduates. But it has always been made clear to students that there is the right to do so. And it is not a commercial fee or loan – many of which themselves are adjustable anyway. It is a graduate repayment scheme with terms set by government and adjustable by government. The advocates of a graduate tax do not envisage that the graduate tax rate is permanently set for each cohort of graduates as they leave university and, in this respect at least, they have a point.

The forthcoming general election presents a dilemma to both big political parties. They have to say something about higher education, but they do not want to nail their colours to any particular proposal now. A review of the calibration of the scheme is a way to avoid political traps now and give them maximum room for manoeuvre after the election.

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1 comment

  1. Albert Wright says:

    This is a welcome contribution to the current debate, which shows how complex the issue is and how difficult it will be to solve.

    The idea of a 5 year rolling review would have merit.

    However, this alone will not be enough to achieve widespread agreement as the fundamental problem is the individual positions of each independant institution and the individual situation of each individual student. This gets in the way of creating a fair and reasonable outcome for the stakeholders and especially the tax payer.

    Some Universities are very wealthy, some are bordering on bankruptcy. There are wealthy students and poor students. High cost subjects do not always lead to high incomes. Cross subsidies with research incomes, donations, commercial income, the situation with overseas and postgraduate student income etc differ from organisation to organisation, as do the costs of delivering the same subjects.

    At the end of the day the Government should decide and the Universities should stop moaning.

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