Who should pay for higher education – and how?

By Bahram Bekhradnia –

We have moved very rapidly in England from a situation where full-time undergraduate students paid nothing towards the cost of their higher education – that was the case until 1998 – to a position where students will in future pay 100% of their costs. That is the apparent effect of the new student finance regime that has been proposed by the government. Given that the philosophical basis for the introduction of fees in the first place was that the benefits of higher education should be shared between the state and the student, and therefore that it was right that the student should contribute to the cost, the implication of the state making no contribution would, on this logic, be that all the benefit is private, and that the state receives no benefit from educating graduates.

That would be the case if it were true that the state is not contributing anything to the cost of higher education. In fact, that is not the situation. What has changed is the basis on which the state will in future make its contribution, because the state will continue to contribute, just in a very different way. Additionally, it is possible – in fact the government claims that it is the case – that the balance between the amounts contributed by the state and the individual could change radically again at some point. At present higher education institutions (HEI’s) receive grants directly from the government, through its intermediary the Higher Education Funding Council for England (HEFCE), and it also subsidises the loans that it provides students in order to pay their fees – subsequently being repaid through what is effectively a higher tax on the salaries of graduates.

In future the government has decided that it will not provide grants directly to universities but will provide funds to universities only by subsidising loans to students which they use to pay fees. This is a major ideological shift. It is presented by the government as increasing choice for students and providing funding to universities only insofar as students exercise choice and choose to go to that university, so also improving the incentive to provide high-quality education, be customer focused and so on. It is classic market economics. The reality though is that universities at present are funded only to the extent that they recruit students (that is the basis on which the government grant is given to universities). It could be that there will be some shift in the psychological state of students as they pay the money to universities themselves instead of the government, but even that is unknown. But it is highly debatable whether student choice will be affected at all. Nor is it at all likely that the government will achieve the sort of savings that it has claimed will accrue because of its withdrawal from providing grants directly to universities. As part of the package that included increased student fees and reduced government grant, the government has increased the maximum fee that universities may charge and with it the loans that it must provide to students. Additionally, at the same time it has reduced the amount that students must repay each month – despite the fact that they will have larger loans – while increasing the interest rate that they must pay, as well as the length of time over which they must pay as well. The balance is likely to be that an awful lot of people who take loans will not repay their loans in full. Consider too that the government’s financial calculations were based on assumptions that average fees would be £7,500, whereas the reality appears to be that few universities will charge below that level. This means that the average will be much higher and therefore the cost to the government of the loans that it must make will be much higher too, all resulting in a recipe for much higher costs to the government than it had assumed.

There is no doubt that the government is in difficulty, and that the difficulty is born of ideology. The reality is that so long as loans are subsidised, the amount of loans that are taken, and the rules for paying back the loans, will make a difference to public expenditure. The government has to either moderate the level of the fees (and therefore the total amount of loans that it has to provide), or it has to regulate the number of students that are eligible for such loans. That is going to be a problem not just for this government in this country, but wherever this approach to funding is adopted.

The way that this government – and perhaps others following a similar path – thought that they would curb the level of fees was through straightforward market competition. Some universities would be unable to charge high fees because students would shun them and go to other universities which either had higher quality or better reputations, or lower prices. There are a number of problems with this approach. First, higher education is not a market like other markets. Higher education is a positional good, and it is not at all clear that there is the same sort of price elasticity in higher education as elsewhere. No doubt because of the changing job market where degrees are essential, students seem to be prepared to pay to go into higher education even though prices rise. A trebling of the fee in 2006 made no difference to demand. Allied to this is the fact that the government has set a price limit – the maximum fee is £9,000 – which narrows the band within which competition might take place. An oddity about higher education and the market is that there is some evidence that price is seen as a proxy for quality, which provides a disincentive for universities to reduce prices – as they might be seen as second rate. And finally, and perhaps most important, there is every indication that there is a large latent demand for higher education, and so even if some universities that have higher prestige take more students, those with less prestige are likely still to find that they have customers, even at prices that might seem at odds with their position in the market.

And that is why it is likely that the UK government will try to curb the number of people eligible for higher education – it will try to find a means of reducing the demand, and so force universities that do not have the reputation of some of their peers to compete for a limited market on the basis of price. These are extraordinary times, and the tectonic changes that are being introduced, almost haphazardly, are quite extraordinary. The stakes are high, and we are about to leap into the dark. What is certain however is that students of the future will pay a lot more for their education than in the past, and it could well be that opportunities to go to higher education are reduced as well. That does not sound like a good future outcome.

Bahram Bekhradnia is Director of HEPI, was formerly the Director of Policy at HEFCE for ten years and has advised twenty different national governments on the financing of higher education.

The Higher Education Policy Institute (HEPI) is the UK’s only independent think tank devoted exclusively to higher education. Founded in 2002, HEPI has built up a strong reputation for robust and objective policy analysis and advice across a whole range of higher education issues. Its mission is to improve higher education in the UK by creating a better informed policy environment – informed by research and analysis, as well as drawing on experiences from other countries.

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