What’s the real political problem with higher education funding?

This blog was kindly authored by Johnny Rich, Chief Executive of Push and Chief Executive of the Engineering Professors’ Council. It has been written in a personal capacity.

In recent weeks, the issue of burdensome student loans has metastasised across the media. Then last week the Treasury’s Supplementary Estimates revealed that, even with frozen thresholds and above-inflation interest rates, the current system is necrotising public finances.

It seems time is up for the system that protected the English higher education sector from the worst ravages of austerity after 2012. It was always, as the OBR called it, a ‘fiscal illusion’ and, when the magician’s sleeves were clipped in 2018 with new ways to account for the cost of loans, it forced successive governments to squeeze students and graduates ever harder.

It’s still not enough though. Graduates feel their debts were ‘mis-sold’ and the cost to taxpayers is breaking the social compact with universities, which are in turn facing financial crisis.

Should we tweak the system to make it even more expensive for students and taxpayers? Should we slash the cost of delivering higher education and face the consequences of, presumably, worse outcomes and lower graduate premiums, which would only make matters worse? Should we abandon mass higher education altogether and return to a system where the privileged have access to universities that beget more privilege?

The system needs a reset

The real problem – for politicians and for us all – is that the current system doesn’t incentivise the outcomes it needs to drive. Indeed, it actively drives other undesirable outcomes like high debts, skill shortages and unemployed or underemployed graduates.

Key to the public interest in higher education is the need to produce a graduate population that meets the economic and social needs of the future. That means raising their employability in the broadest sense – their skills, knowledge, behaviours, values and, perhaps most of all, their ability to adapt to shifting labour markets.

We need a system that plugs the yawning gaps in sectors such as engineering, but which also ensures that people like me (who studied English & Philosophy as an undergraduate) emerge not only with cultural capital, but with an awareness of their transferable employability that they can articulate to themselves and to potential employers and deploy in their work and lives.

Yet that’s not what the current system is designed for. It was designed to ‘put students at the heart of the system’. It places the future of the highly skilled labour market at the mercy of the choices of 17-year-olds (14-year-olds, in fact, given that that’s the age when most set out on circumscribed pathways). (I’m well aware I am oversimplifying higher education to the school-leaver model. Please forgive the rhetorical device. The point remains whatever the age of applicants: they have neither the information nor the incentive to make individual choices that will aggregate to match future labour market needs.)

The money follows the student. If they want to study Mickey Mouse courses (i.e. History of Animation), then universities are incentivised to offer those courses with little regard to our national need for Disney historians or fostering those students to transfer the employability they’ve developed to where gaps do exist.

Meanwhile, if they want to study engineering – where there are skills shortages running into the tens of thousands a year and yet able applicants outnumber places – then the system cannot expand because the income a university can get is capped at around £7,600 lower than the cost of providing that degree.

The system relies on the economic foresight of young people in a world where high-quality careers support is a tiny voice amid noisy misinformation and confusing heuristics. But it’s worse than that. It also relies on them putting the national interest ahead of their own ambitions and interests – making what appear to be ‘safer’ choices, rather than pursuing what actually interests them and the career they want.

It’s no wonder it doesn’t work

We need to redesign the higher education funding system so that it balances the needs of employers, society and the economy with opportunities for prospective students. That system must be sustainable in the long-term, and provide sufficient funding and incentive to universities to deliver a high-quality education that meets those needs.

If we could do that, then employers would find their skills gaps met, the economy would prosper, graduates would find suitable jobs and universities would thrive. Rather than trying to slice an increasingly expensive cake ever more thinly, we’d be baking a bigger cake.

There is a way to do this: bring employers in from the cold.

There’s an increasing number of experts, think tanks, economists and others calling for some form of graduate employer contribution. Having flirted with the idea of a contribution before the election, the idea fell out of favour with the government after the increase in employer national insurance contributions looked like a tax on business growth and the labour market. Instead, Labour took sanctuary in tweaks to the current system.

However, employer contributions can be designed so they don’t cost employers any more – or potentially less – than the current system for the next 25 years or so. By that time, even if there were additional costs, they would be barely detectable in long-term labour market corrections.

There are five steps

1. Abolish tuition fees. Retain (and improve) loans for maintenance (and continue with the reintroduction of grants).
2. Instead of graduates paying 9 per cent repayments on earnings over the threshold, reduce it to 3 per cent for their maintenance loan (time-limited) and charge employers a 3 per cent contribution (not time-limited). The other 3 per cent could be a saving for employers, a boost to graduates’ take-home pay or, most likely, a combination determined by the labour market.
3. The employer contribution is paid to the institution where the graduate studied (or multiple institutions according to credit accumulation under LLE arrangements).
4. Universities that do not meet access and participation benchmarks must pay into a national access fund, which is redistributed to universities that exceed them.
5. To manage the transition to this system, instead of the government lending to individual students for 40 years, they lend to universities for longer (or indefinite) periods based on student numbers, but otherwise with repayment terms parallel to current graduates.

This would give universities an incentive to restrict entry to courses that do not deliver what employers or society value. It would also ensure every course fosters wider employability and every university supports its graduates.

It would give employers skin in the game: influence over higher education provision, but not transactional control for short-term goals.

And it would give students assurance that, whatever their course, their university is as invested as they are in it leading somewhere.

This is the graduate employer contribution model I first outlined in a HEPI paper in 2018 and articulated in more depth in 2024 when HEPI commissioned an independent economic analysis and polling of the proposal alongside various other models.

The projections by London Economics suggested this would save the exchequer many billions per year, and the polling placed it as even more popular among students than an NUS proposal to reinstate a fee-free, full-grant model. Other polling by Public First suggested it would be popular with the wider voting public too.

The issue of higher education funding gathers political salience every few years and, when it does, it quickly becomes an irresistible tide. The conditions are aligning for it to become a perfect storm. The Green Party is polling at over 20% ahead of Labour among under 24s (more of whom will have the vote at the next general election). Reform UK is touting an (unaffordable) removal of interest on loans. And a prominent candidate for the next prime minister is a former NUS President who will face questions about higher education funding whether it’s because he wants that debate or his opponents do.

Any serious political party can no longer simply command the waves to turn back. They need to get ahead of this issue with a fair, affordable, workable solution that fixes the real problem of generating growth through opportunity.