University funding challenge

I've written this feature on university funding for the Jan/Feb 2015 edition of Public Finance.

As the general election looms, Nick Clegg’s decision to back a trebling of tuition fees could come back to haunt him. A study by the Higher Education Policy Institute think-tank in Oxford suggests 10 Liberal Democrat university seats could be vulnerable to student anger, after the party’s decision to support higher fees despite its manifesto pledge to phase them out.

here are also doubts that the expected financial savings will be made. There is growing evidence that graduates will face debts into their 50s, while the Exchequer may see little real benefit because nearly half of the loans will have to be written off.

To understand why, look again at the 2012 student funding package and how it differs from what went before. When Labour introduced income-related ­tuition fees of up to £1,000 in 1999, it also replaced the remaining maintenance grants with loans to be repaid at a rate of 9% of graduate income above £10,000 a year. In 2006, fees rose to £3,000, although universities were permitted to charge less. Fees were no longer income-related, though some maintenance grants were restored. Tuition fee loans were introduced and the graduate repayment threshold was raised to £15,000.

The coalition government trebled fees to a new maximum of £9,000, extending the income contingent loans accordingly. But two crucial additional changes were made. First, the repayment threshold was increased to £21,000. Conservative ministers wanted it to be £18,000, but the LibDems insisted on the higher level. The second was the addition of a real rate of interest. Previously debt rose with the retail price index (RPI).

Under the new system, undergraduates are charged RPI+3% while studying and then pay interest of up to RPI+3% on a sliding scale once they graduate. The result is that from this year, graduates will pay off their loans – now much larger after the fees hike – much more slowly than under the old system.

Read the full article here.

University funding challenge

In my latest Sutton Trust blog, I look at the funding options facing higher education as debts mount for students and the government.

Hearing the BBC radio news on Tuesday, it felt a bit like a delayed echo from the spring. The headlines were all about the three quarters of students who wouldn’t pay back their loans in full, and the fact that those earning the salary of a good teacher would be paying loans off into their early fifties.

These findings, which came from April’s Sutton Trust/IFS Payback Time? report, were an important part of the evidence base for the latest inquiry from the Higher Education Commission, chaired by the impressive Ruth Thompson, former Director General of higher education in the old Department for Innovation, Universities and Skills.

In April, the IFS also joined others in highlighting how little of the extra revenue raised by the increase in fees from just over £3000 to a new £9000 maximum was likely to be recouped from the Government because so many students would not repay their loans in full. Just over 56p in every pound loaned would be paid back.

What has changed since then is that the new tougher mortgage rules introduced by the Financial Conduct Authority mean that banks are no longer allowed to ignore student loan repayments when assessing mortgage suitability. As the FCA confirmed in June, this is now regarded as ‘committed expenditure’, reducing what graduates can borrow. Our IFS report showed a typical successful teacher paying back around £2000 a year after tax through their forties.

Aside from the increased loans to cover the higher fees, there were two other significant reasons for the low levels of repayment: the increase in the repayment threshold for the new loans – £21k rather than £15k – which means slower payments after graduation; and a real rate of interest of up to inflation + 3%, which increases the total amount borrowed even more. For our report, the IFS calculated that the average student will graduate with £44,000 worth of debt, but an average of £30,000 would be written off at age 51 or 52 for the 73% of students who had not by that stage repaid their loans in full.

The cross-party commission didn’t pull its punches. “The current funding system represents the worst of both worlds,” is how the study puts it. “The government is funding higher education by writing off student debt, as opposed to directly investing in teaching grants study….Students feel like they are paying substantially more for their higher education, but are set to have a large proportion of their debt written off by the government.”

But it is easier to diagnose the problem than to find a solution. And although ministers gamely defend the new system (even if they may believe the threshold was raised higher than was prudent) others believe change is inevitable, including the Select Committee recently. In this spirit, the Commission suggests several options:

• Cutting tuition fees to a £6,000 maximum. This would reduce student debt, but it would leave an estimated £1.72bn funding gap for universities. This is the option that Ed Miliband was reported to favour, but which is apparently not backed by his shadow chancellor because of the cost.
• A graduate tax which would see all graduates paying back a proportion of their income rather than what they borrowed. The Commission estimates this would require government to borrow £4bn to fill the gap between ending fees and the arrival of tax revenues. They also point out that it would reduce the link between a graduate and their studies. Some argue that the present system is a form of graduate tax.
• An option favoured by some elite universities of removing the £9,000 upper limit on fees might allow more money for universities and more competition, but higher fees would mean even higher levels of public subsidy for loans (unless the universities took the risk for those loans, as some have suggested)
• Different charges for different universities or courses could also reduce the number graduates from expensive courses with high fees even if they were essential for the economy.
• They also looked at reducing the threshold or interest rate, while maintaining the status quo, and at a lifelong learning pot (akin to Singapore).

There is one other option that the Commission didn’t include, but which should be considered in this debate. This would involve reducing the maximum to £6000 for all students entitled to a full maintenance grant – around four in ten students – rather than the whole student population. Doing this would still require a government to plug a funding gap, but it would be rather smaller than cutting fees for all, and would also cut the level of loan default. Freezing the threshold for repayments might also help pay for it.

The argument for this change is that, despite improvements, there is still a significant access gap ranging from 2.5 fold between those from the richest and poorest neighbourhoods for all those entering higher education to nearly ten-fold for access to the best universities. Reducing the levels of debt for less advantaged students should be a priority of any review.

Those who argue against means-tested fees say that repayments are based on graduate earnings, so it is unfair to base them on parental income. Yet from 1998 to 2006, this is what happened. More to the point, it is what currently happens with maintenance grants and loans, where the idea that all young people are financially independent at 18 is not accepted. Moreover, our polling shows 2-1 backing among the public for the idea. As we think about the changes that might help rebalance our fees and loans system ahead of next May’s election, a measure which could also improve access should be on the table too.

Student grants should be better targeted

Universities secretary John Denham has had to clawback on the grants regime he introduced shortly after his appointment last year. A family income ceiling of £50,020 rather than £60,000 will be imposed on those getting grants and starting university next year or later. But this still raises a bigger question.

The whole point of the new fees regime is supposed to be that no fees or maintenance costs are repaid until after graduation, and then only as a proportion of income over a minimum level. By extending the grants regime so dramatically last year - so that students from higher earning families get a few hundred pounds - at a time when university applications had defied the critics of fees and risen significantly, Denham was making a costly political gesture.

But it was also a serious strategic blunder in that it undermined government efforts to sell the new loans regime. Denham should revisit the whole grants scheme, and refocus it to provide generous scholarships for poor bright students, especially those who would benefit most from courses at top universities not available near to home, and on students taking up strategically important and shortage subjects. Other resources should be targeted on persuading poorer youngsters to get decent A levels in the first place.

Is the "£800m" on university retention really wasted?

The National Audit Office (prop. Edward Leigh) continues to churn out its tales of waste and woe in the education world. Its latest report allegedly shows that £800 million has been wasted on programmes to retain university students. In fact, the sum being spent is around £160 million a year, as the NAO is doing the sort of thing it and others complained about when Gordon Brown used to do it, wrapping several years' spending together. And there has been a small improvement in retention rates - already among the best in Europe - at a time when there has been a substantial expansion in student numbers, with a growing number from poorer backgrounds. The NAO is on stronger ground when it says that universities should do more one-to-one tuition. But this £160m a year is probably a much better use of resources than the £400m now being poured into maintenance grants for middle class students who would have gone to university anyway.

Are tuition fees deterring poorer students?

Today's Guardian proclaims that "Tuition fees favour the rich" and that children from poor families say fear of debt is deterring them from university. But is this really true? The Guardian's headline is their interpretation of research from Staffordshire University for the Sutton Trust, which found that

• a majority of students (59%) who had decided not to pursue study in higher education reported that avoiding debt had affected their decision ‘much’ or ‘very much’.
• more than half (56%) of all the students surveyed who were thinking of going into higher education were considering a local university because of the financial implications.
• most students understood bursaries, but only 30% had actively searched for information on financial support. Almost half (45%) did not know whether they were eligible or not. Had they known that they were eligible for a bursary of £2,000 nearly 85% of those from low income homes said it would have encouraged them to apply.

The Staffordshire survey drew from 20 schools, and its main conclusions are more nuanced than the Guardian's interpretation suggests. First, a lot of students go to local universities instead of one far away from home. If students are deterred from going to a Russell Group university, such as Oxford or Cambridge, then this is a concern. But if a student is opting for a similar course at a local university to one they might otherwise have chosen 200 miles away, then this is simply following the pattern of most students in most countries of the world, and it is hard to see why this should be of concern (in case you ask, I cycled five miles to my local university as a student).

Second, it would seem that ignorance of bursaries rather than tuition fees is what deters potential students: the universities have simply not publicised their bursaries well enough, and the sector collectively has done far too little too. Recent reports from the Office for Fair Access showing that many bursaries went unclaimed even by those who were already at university confirm this.

The research deals with those who haven't applied to university for whatever reason. But, if the Guardian's thesis is correct, this would presumably be reflected in the application figures. As it happens, and the Guardian acknowledges this in its penultimate paragraph, the Universities and Colleges Admissions Service UCAS published its latest application figures today.

They showed a 7% increase in applications to university compared with this time last year (or a 10% increase in English students applying to English universities). And they found the increase to be higher among the poorest students: nationally, data on the socio-economic background of all UK applicants aged 18 years and under shows that 29.6% were from the lower groups (4 to 7) in 2008, compared to 28.9% in 2007. This is not surprising, as the evidence of the first introduction of tuition fees was that there was an increase, albeit small, in the proportion of students from lower socio-economic groups.

The issue is, then, not whether tuition fees 'deter' students who were not applying in greater numbers before they were introduced, but how to encourage more disadvantaged students (a) to gain the necessary qualifications and (b) to consider higher education. That is the Sutton Trust's main point - and there is a particular issue about students being sufficiently ambitious in the university to which they apply - and how we ensure that students access all the financial support and bursaries to which they are entitled. It is not about declaring class war on fees.

There are limits to student work

I've never been terribly impressed by the annual whinge about students taking part-time jobs to supplement their interest-free student loans while pursuing their undergraduate courses. It is commonplace in many countries; the right job is good on the CV; and the best universities, like Warwick, integrate it into their undergraduate offer. But there are limits.

Good politics, bad policy?

The news that graduates are to get a five year loans holiday and that eligibility for grants will increase significantly may seem like good news. But there is a good reason why the proposals have only received a "cautious welcome" from vice-chancellors. This £400 million wheeze may make it easier to win back seats lost to the Liberal Democrats in university towns. But it will do very little to improve access for poorer students. The big problem is raising ambition rather than finance - the evidence of both the 1998 and 2006 fees changes is that there is no impact on access from the higher fees, because both packages effectively allowed for post-graduation repayments. Had the £400m been invested in a big expansion of summer schools, there would have been a bigger return. Instead, there is a huge deadweight cost. And far from being a signal that higher fees are imminent, vice-chancellors must be wondering whether this first announcement from the once anti-top up fees minister John Denham is a signal that they cannot really expect to be able to charge higher fees after the promised 2009 review.