How a better HE funding system could make everybody happy

By Johnny Rich –

Minimal student debt, properly funded universities, low cost to the taxpayer and highly employable graduates available to recruiters at the right price. An impossible pipe dream, surely?

Actually, no. But unfortunately, such a confluence of virtues would indeed be impossible under the current HE funding system. That is because each is set at odds with another. For students to have low debts, the universities must go without funds or the taxpayer must foot the bill. And, as for employers, there’s no driving force in the system to ensure students follow the paths they’d want, nor that universities should encourage them to do so.

And yet there is a way to align these interests. It all starts with looking at who benefits from higher education.

A little history

Once upon a time, people didn’t need degrees. What training they needed was mostly delivered on the job. The cost of skilling the UK workforce was effectively met by its businesses. And they didn’t mind because they were ensuring their employees could do their jobs.

But over the years, employees became more mobile and employers needed more flexibility. Employers also wanted staff with more formal qualifications and so got used to moving their investment from training to hiring. As the demand for graduates grew, the clamour among students for university places echoed more loudly too.

The UK expanded its HE system so that the country could serve this increasingly skilled, increasingly knowledge-based economy. And according to Lord Leitch’s landmark review, by 2020 we will need to go even further to meet our future labour needs.[1] Half our jobs will be filled by individuals who have paid tens of thousands for the privilege of doing their jobs.

But many of those jobs will not be the ones they expected to get when they invested in their education. There are currently over 8,000 UK students studying forensic science. There are only 9,500 jobs in the entire sector, and most of those are already filled – by chemistry and biology graduates.

Those eager CSI enthusiasts may well get jobs – well paid ones even – but, as with many other degrees, when they embarked on their financial adventure, it was on a false prospectus.

Because the expansion of HE since the 1980s represented a shift in the burden of cost from employer to student, it seemed only fair that the new courses should be the ones the students demanded. That way, no one could argue they weren’t the prime beneficiaries of their education, surely? But no, because their information about, and understanding of, the labour market has been at best limited and at worst misguided.

Meanwhile, it’s been costing taxpayers more too. After all, our economy and society needs graduates; doctors, social workers, and teachers. But, even though the taxpayer has been making a big contribution to the bill, we’ve had little say in whether HE would meet the nation’s labour supply needs.

Make the funding follow the value

Higher education has three interdependent beneficiaries: the students who want rewarding careers, the nation which has social and economic needs, and the employers who need a highly skilled workforce. Why not let the economic benefits decide the balance of who pays? Indeed, why not let those same forces determine which universities are best at delivering benefits?

In other words, why not link the funding of universities directly to their ability to generate ‘value’? It just so happens, the labour market has rather a good way of measuring value: it’s called ‘pay’.

So this is my big idea for the future: a graduate tax… but not as we know it. Instead of adding the cost of their education to the graduate’s national insurance contribution (which, in effect, is the current repayment mechanism), add it to the employer’s as a percentage of the graduate’s pay. Then give that money back to the university where they studied and let them set their own student numbers.

Why it would work

If a graduate is highly employable, adding plenty of value to their employer, they will command a high salary and their university will be rewarded commensurately for their role in making them so valuable.

If however a university’s graduates aren’t proving to be a good source of revenue, the university will have to question what it’s doing. Should it stop offering media studies, even though the student demand is there? Should it try to teach it better? Or, more likely, it would work harder to ensure the students recognise the employability skills they are picking up through their studies. Recruiters, who often complain that graduates may be well educated but aren’t prepared for the workplace, may find universities are quick to change their priorities when their funding is at stake.

Lord Browne argued that employers’ contribute through the premium they pay to graduates.[2] The question he didn’t address is, what market forces might cause graduate salaries to rise if student debt increases? Workers are paid not according to their need, but according to their value.

Wider participation and student contributions

One of the key advantages is that this system would remove the principle barrier to entry into university: debt. Or more accurately, the fear of debt. It does not matter how ‘progressive’ the current funding system may be, able students from non-traditional backgrounds will never go to university in the desired numbers so long as the system looks too expensive, too risky and too complicated. Every perceived barrier needs to be removed, otherwise these students in particular will not even entertain the idea. They’ll never discover that the financial hardship may be more manageable than they might believe.

Don’t be mistaken however: the students would be contributing – probably just as much – but doing so indirectly. As the CBI would no doubt argue, higher taxes on employers will drive down graduate salaries to compensate. In other words, the total of pay and NI might be unaffected. This wouldn’t bother the graduates: ask any student whether they’d rather earn £27k five years after graduation and owe £40k, or earn £25k and owe nothing. I’ll give you odds they’ll plump for the latter.

I said that students would probably contribute just as much. It is possible graduate pay would not fall. If Lord Leitch was right about the rising demand for graduates, the competition to recruit them may indeed keep their pay buoyant. If so, it would demonstrate that graduates really do offer sufficient value to their employers and, if that is indeed the case, it’s only fair (for their sake and their universities’) that they should be paid accordingly.

If on the other hand, graduates aren’t worth it, they won’t attract the salaries. The universities wouldn’t get their funding and would stop producing so many graduates. Demand and supply would keep each other in check. Personally I believe more graduates are needed, not fewer, and their pay will hold steady, but if higher education isn’t that valuable after all, we ought to let it contract.


But what about the arts? What about social workers and nurses? Won’t universities stop offering these courses because they don’t command high salaries?

Firstly, the pay gap between arts and STEM courses is not as significant as some people imagine and the demand for courses and the salaries paid for those graduates will be led by the labour market. If the nation finds itself in need of nurses because universities don’t want to teach them, it would have to start paying higher salaries to attract people into the profession, making it more worthwhile to teach those courses. In the short term, for certain ‘reserved’ professions, it would be consistent with the idea of ‘the beneficiary pays’ if the Government subsidised such courses directly to maintain labour supply. After all, taxpayers do benefit from good nursing.

Secondly, there are not endless numbers of students wanting to study STEM subjects. Universities have to respond to the supply of raw materials and they may find they can earn a better living teaching art history to students competing hard to join those courses than they can by churning out reluctant engineers. Arts courses cost much less to run and so, even with lower income, the financial margin may be greater.

There are of course other objections. Most can be answered. Some, probably, cannot. There is probably no perfect system of HE funding, but one thing is certain, the Government’s current plan is a cart hurtling down a track. The stakeholders – students, universities, employers and taxpayers – are four horses pulling the cart, but each has been harnessed in a different way, pulling against the others. Sooner or later, this cart is going to end up in pieces or in a ditch. Unless our solution gives everyone a reason to pull in the same direction, then it’s not a solution.

Johnny Rich is a media and higher education specialist with various roles as Publisher of brands such as Push (the leading independent resource for prospective students), Real World Magazine, the Recruiters’ Guide to Courses & Campuses and the Oxbridge Students’ Careers Resource. He is also a director of the Higher Education Academy. He appears regularly on television and radio as a specialist on students and higher education issues.

[1] Leitch Review: Prosperity for all in the Global Economy – World Class Skills, (TSO, 2006) suggested that by 2020 half of all jobs in the UK would be at graduate level.

[2] The Browne Report: Securing a Sustainable Future for Higher Education in England (DBIS, 2010)

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