Meeting the challenge on student funding

How do Labour plan to address the politically fraught issue of higher education funding?

This week’s letter to The Times signed by 20 university vice-chancellors has brought into the open arguments between universities and the Labour Party about the future of university funding.

Labour have proposed reducing university tuition fees from the current £9,000 to £6,000. The vice-chancellors decided to break cover and publish their letter attacking plans that Labour haven’t yet announced because of their growing concern that a decision to cut fees would be in their manifesto. Sources close to the negotiations have suggested that higher education leaders had been led to believe that they had won the argument on maintaining fees at their current level, only to see any reassurances overturned by Ed Miliband.

The issue of higher education funding has been a politically fraught one since John Mayor’s Government introduced repayable loans to cover student maintenance costs in 1990. Each move since to reduce state support has been accompanied by outrage about the impact that this will have on the opportunities for poorer students to enter higher education. Despite these claims, the data shows that participation rates have increased significantly over recent years, up from 30% in the late 1990’s to nearly 40% now. Most importantly, over the same period there has been a significant narrowing of the participation gap, with groups who were the least likely to go to university in the 1990’s much more likely to do so now.

As the signatories of the letter argued this week, meaningful and targeted help to those worried about the cost of university would be best delivered via increases in maintenance grants, which are available for students from poorer families, rather than cutting fees across the board.

A study for the Centre for Research in Education Inclusion and Diversity showed that, rather than helping to increase participation rates, cuts in student fees are more likely to help middle class students who are likely to go to university anyway and are most likely to earn the most following graduation.

Despite this, it is understandable why a pledge to reduce fees is politically attractive to the Labour leadership. The party is keen to build on their support from younger voters, and evidence suggests that winning over student voters could make a significant difference to their chances, possibly delivering another eight seats.

The cost of any pledge to cut student fees would be significant, however. University leaders claim that it could be £10 billion pounds over the next parliament. The fear is that at a time when all government departments will face major spending cuts, it is highly improbable that any extra spending to make up the shortfall from cutting fees could be delivered without at least some of the money coming from current government support for the University Sector. Further cuts to teaching grants or other funding for the university risks a renewed crisis. This comes at a time when the sector is facing a squeeze from a range of sources, such as increasing pension costs as the workforce ages and students using their purchasing power to become more demanding of the services offered by their university.

The Labour Party do have very strong argument in pointing out that, despite the Coalition’s claims that increases in fees move the cost burden of providing a university education from taxpayers to those who directly benefit from it, higher fees have actually increased costs to the public sector. The Government is now expected to have to write off up to 45% of loans as graduates do not earn enough to pay them back, or avoid paying, for example by leaving the country. The proportion of expected write-offs and the extra interest rate subsidy needed for larger loans suggests that the Government won’t have made any net savings at all despite the increase in fees from just over £3,000 to the current £9,000.

Loan write-offs are, however, provisions against future income and the cost of these don’t impact on the Government’s current cash flow. If the Labour Party do push ahead with delivering a reduction in the level of fees, the challenge they face is finding the money now to cover the addition cost even if, in the longer term, the costs to the public sector will balance out.

What universities desperately want is more certainty that funding is protected from the vagaries of the health of the public finances or political priorities. Leading universities who are keen to maintain their position in international league tables argue that current fee income is insufficient. Whatever the result of the next general election, however, it is difficult to see a future government considering increases in tuition fees. Not only would it be difficult sell politically, but higher fees would further increase the costs to the taxpayer as the cost of the interest rate subsidy and loan write-offs would increase as well. The potential extra cost to the taxpayer from higher fees therefore acts as de facto cap on any significant increases above the current £9,000 limit.

One idea that could re-emerge as a solution to the university funding conundrum in the next parliament is an idea that has been floated by the former Universities and Science Minister, David Willets MP, which is a plan for universities to take ownership of the loans given to their students. Future repayments would provide them with an independent and reliable income stream.

As well as solving the problem of delivering a predictable income stream for universities, passing them the responsibility for debt collection might help to reduce the cost of write-offs, because universities which managed to reduce the proportion of their loans that had to be written off could gain significantly.

The argument is that universities might be in a better position to keep a track of their students after graduation and enforce payment. Additionally, the fact that they would gain financially if a higher proportion of their graduates gain and maintain employment, above the earnings threshold over which repayments are due, means that universities could be better incentivised to focus on developing the employment skills of their students.

A major barrier to the introduction of this idea is devising a system which allows universities to start on an equal playing field so that those with higher earning graduates don’t start with an in-built advantage. This could be solved via the collection of accurate data about current repayment rates of graduates from each institution.

As well as providing more independence and certainty for universities’ future income, if passing on responsibility for debt collection to universities is successful in reducing the burden of loan write-offs, it could also open up an opportunity for tuition fees to rise in the future.