The HE Debate: Where next for...funding?

04 Feb 2015

Pam Tatlow, Chief Executive, million+

In a Behind the Headlines series of three pamphlets published in 2013, million+ and the international consultancy firm London Economics reviewed the impact of the Coalition Government’s higher education reforms on taxpayers, students and universities in England. It seemed to us to be important to bring some economic analysis to the table and review the impact of the reforms on the country’s finances as well as on individuals and institutions. After all, the Coalition had hung its hat on the need to reduce the structural deficit and Ministers were eager to point out that the replacement of the direct funding of universities with student loans would enable both the deficit to be cut and the number of student places to be retained.

This was always a questionable argument but it was backed by the then leadership of Universities UK, the trade body for universities, which openly argued for the lifting of the fee cap to £9000 per annum for full-time students prior to votes in the House of Commons and the House of Lords in December 2010. The idea that all Vice-Chancellors were united behind UUK’s position is a myth. In a letter published in the Telegraph on the day of the Commons vote, a number of Vice-Chancellors set out their concerns that the government was going too far in removing direct grant.

Since 2010, the leaders of universities in England have had to manage a raft of far-reaching changes of which the fees and loan system has been just one. Five years on, it would be astonishing if Vice-Chancellors were not wary of further reform. However, there are good reasons to consider the challenges but also the opportunities presented by other options. The 2012 funding reforms remain contentious politically and there are real questions as to whether they are the most efficient way for taxpayers to fund universities.

Rarely mentioned but also worth considering are the huge and growing transactions costs of making an already complex system even more complex. Transferring large tranches of government money to the student loan company for students to access via a loan with fee income going to universities, only to be recovered from pay packets at varying rates of interest and with many adjustments according to earnings status for 30 years, is highly inefficient in economic terms and requires literally millions of transactions. There is also the vexed question of the impact of the reforms on part-time students and those who want to enter university when they are older - groups for whom the 2012 fees and funding regimes have proved stubbornly unattractive.

It is therefore surprising that, just weeks before the most closely fought and unpredictable general election in a generation, the leadership of Universities UK should publicly enter the political ring to criticise the suggestions by Labour, the main Opposition party, that they were considering a reduction in the headline fee to £6000. Bearing in mind that the medium to convey the message was another letter to the Times, it was inevitable that this would prompt widespread criticism of Labour’s (alleged) proposals.

Whether this kind of megaphone diplomacy is wise is a separate question. However, the UUK letter triggered much ill-informed debate about the costs of a reduced fee and its impact on students. When even respected commentators suggest that a reduction in fees would somehow disadvantage poorer students on the dubious logic that students from more advantaged backgrounds would be able to pay off the loan more quickly, there’s clearly a chasm in understanding about who benefits and who pays for the current system.

If UUK has backed itself into a corner it only has itself to blame. In the last of our Behind the Headline pamphlets Do the alternatives add up?  we focused on the resource flows and implications of a reduction in fees to £6000 per year and separately, a graduate tax model. We made clear that we were not advocating either option and that decisions about the associated repayment regimes were ones that we would expect Ministers to take. Whatever the merits of these alternatives, there is no link between teaching quality and fees charged in the current system and those who defend it and oppose a graduate tax on the basis that it would break the link with quality are being dishonest.

Our 2013 pamphlets also made a wider and important point: the 2012 higher education reforms were to a large extent based on smoke and mirrors accountancy. The cut in the budget of the Business, Innovation and Skills department which is responsible for universities, did not let the government off the hook in terms of the funding of universities and student loans. In fact the Treasury has continued to borrow the funds required to support the system while BIS itself remains under pressure to reduce its own spending further.

The difference, as we warned in parliamentary briefings to MPs in 2010, is that students and graduates have to borrow to fund much larger tuition fees and will be even less likely to pay in full. In fact, unlike the BIS estimates published in 2010, our estimate that there would be a 40p in the pound write-off of a student loan book which would inevitably balloon in size, has proved highly accurate. The impact of the recession on salaries has meant that in April 2014, BIS Ministers finally conceded that the BIS estimate of the student loan write-off was actually 45p in the pound.

Of course the graduate repayment system could be adjusted to reduce the write-off.  For example, an extension of the repayment period from 30 to 40 years, an increase in the interest rate applied to loans, or the reduction in the repayment thresholds from £21,000 a year to £18,000 would all reduce the cost to government and technically make the new system more ‘affordable’. However, Liberal-Democrat Ministers went to great lengths to ensure that they could demonstrate that the repayment system was more progressive than under the previous Labour Government and have resisted any attempts to revisit the repayment criteria.

Whether this is appreciated by students is a moot point. However, there are circumstances in which a lower repayment threshold might be acceptable although it is likely to have to be part of a bigger package of reform.

While some Vice-Chancellors are lobbying behind the scenes for deregulated fees and institutions which are rich enough argue that they would be able to pick-up the additional cost of loans if they could charge fees above the cap set by the state, others will be utterly opposed to the creation of what would effectively become a two-tier system. In this they are likely to be supported by students. It would also be a brave political party to go down a ‘two-tier’ route even after an election. As the Liberal-Democrats have found to their cost, the electorate cannot necessarily be relied on to have a short memory when it comes to decisions made early in a government’s term of office.

Some will argue that universities have more freedom with a tuition fee of £9000 and that they are at less risk of Treasury interference. They have a point although in the short run, this could prove to be an argument of diminishing returns. If Treasury continues to believe that the deregulation of numbers will sort the wheat out from the chaff and that universities which are ‘good’ will increase in size thus compensating for a standstill in the headline fee, tuition fees are unlikely to increase in the near future and at least not until 2016 at the earliest.

Added to the mix is the deregulation of student numbers. Inevitably, this has led to gaming with universities that previously prided themselves on being high tariff, seeking to recruit hundreds of additional students with the lure of unconditional offers. It is a practice which is likely to prove catching while the risks to those universities which traditionally pitched themselves in the ‘middle ground’ are obvious.

There are, however, wider problems with the current system. All the evidence suggests that the 2012 reforms have done little to promote the diversity of the student profile in terms of age and part-time study. The UK, and modern universities in particular, have long-traditions of offering courses of high academic quality and relevance to those who want to study later in life or on a flexible basis. Far from building-on this excellence, the 2012 reforms have proved to be the proverbial wet-blanket.

All this has happened at the same time as research funding has become even more concentrated. When UK-wide, 12 universities get 50% of the recurrent research funding provided by tax-payers, 31 get 75% and the other 130 share 25%, there has to be something wrong. If Ministers really do want to promote the role of universities as anchor institutions in their localities, then there is good reason to re-think the distribution of research funding and every reason to ensure that all universities receive funding to develop and sustain their research infrastructure.

The next government will need to do much more to ensure that there is a stream of funding for translational research separate from the Higher Education Innovation Fund. This would allow universities to work more responsively with business and not-for-profit organisations to translate original research for business and service gain. As part of a concerted strategy to address the historical imbalances in regional growth and boost the role of universities in the regions it could be a winner and sit alongside a Small Business Agency with a regional brief and a new Business Bank with a regional focus.

It is well known that higher education is a net contributor to the economy and society. Rather than considering how little they should invest, this is the time for the political parties to be bold by setting out fully-funded policies which maximise opportunities for undergraduate and postgraduate study for people of all ages, put universities on a sustainable and more secure footing, end the inefficiencies in the current student loan system and promote the role of all universities in research and innovation.

Follow Pam on Twitter: @millionplusCEO