Issue 205: 2019 06 06: Costs of University

06 June 2019

Costs of University

The Augar Report.

By John Watson

The report by the Post 18 Education and Funding Review Panel, chaired by Philip Augar, is more than 200 pages long and bases its recommendations on a very large amount of information about tertiary education in England.  Some of that is hardly news.  Everyone knows that increasing the maximum fee for an undergraduate three year course to £9250 per annum in 2012 and lifting the limit on student numbers three years later has led to a market in education.  Unfortunate side-effects include grade inflation and the use of unconditional offers to “trap” students into the less attractive courses.  That is bad.  On the other hand 50% of students now enter higher education as against 20% in 1990.  That, together with the fact that the University sector seems to be well funded and highly regarded internationally, is good.

The report focuses heavily on the need for more tertiary education outside the university sector and the need to make it flexible but, for those interested in the universities themselves, the sections on their funding make interesting reading.  For example, the report explains the distortions which the fee system creates in the finances of the universities themselves and of the government.

Originally it was expected that £9,250 a year would be the maximum fee, with lower fees being charged for courses which are cheaper to provide.  That, one might have thought, would be the natural consequence of aggressive providers undercutting those who charge too much.  In fact it hasn’t worked like that, the result being that, leaving aside a few honourable exceptions, the full £9,250 fee is charged across the board.  In some cases it matches the cost of the course but it does not do so in others.  An average veterinary course, for example, costs £22,000 a year to run; an average humanities course £7,500.  At a fee level of £9,250 it is in the financial interest of a university to recruit students for the latter.  For the state, the maths works rather differently because here the cost depends on whether or not the student loan borrowed to cover fees and maintenance costs eventually gets repaid, any amount written off being a loss to the Exchequer and, following recent accounting changes, provision having to be made for future write-offs each year.  For the Treasury the most expensive courses are those carrying the highest prospective level of loan default, humanities courses being an obvious example.  Net result from a financial perspective: it is in the university’s interest to push its undergraduates towards the arts; it is in the government’s interest to push them the other way.

Quite apart from the risk that this distortion poses to government finances, there is a question of fairness.  Is it right that those taking low cost humanities courses should subsidise those whose courses cost more to provide, particularly bearing in mind that the latter will gain more in terms of earning power?  There are other subsidies in the system too.  Across the sector, some £740 out of each full fee goes to help disadvantaged students and students from underrepresented categories.  It is of course important that such help should be given, but surely it is a cost which should fall on the state and not be borne by fellow students.

It is for this reason that the report suggests that the maximum fee be reduced to £7,500 per annum, the cost of providing the cheaper courses.  Quite apart from making university education more attractive it would mean that undergraduates only pay for what they are getting and do not carry the burden of subsidising those in high cost courses or the disadvantaged.  Such a change would of course reduce the income of the universities and the proposal is that the government should fill the hole by the use of grants as discussed below.  That, however, takes us to a more fundamental question.  Is the overall funding received by universities at the right level?

Higher education is one of the few public areas whose funding has improved through the years of austerity.  No doubt that lies behind the good reputation of British universities but there is also a suggestion that, in some cases at least, the sector has exploited the new system.  One can glimpse this from a number of factual assertions made in the report.  For example it is a little surprising that costs of teaching represent only 42% of overall costs, a lower figure than in comparator countries.  Part of that may be due to accounting discrepancies but nonetheless the figures are suggestive.  Then there is the fact that 10% of costs are a margin for “sustainability and investment”.  Then there is a reference to public concern over vice chancellors’ pay.  It is factors like these which lead the report to suggest that a university’s income (the aggregate of fees and grants) be frozen at current levels to 2022/2023, a real reduction of 8%.  Clearly in the view of the Panel the finances of the university sector are a little out of control.

The distortion in favour of “profitable” degrees also bothered the Panel.  If the fees were fixed at £7,500 with a system of top up teaching grants, things could be realigned by directing the grant to those courses which are expensive to run.  Recommendation 3.5 suggests this, albeit slightly confusing matters by suggesting that in addition to the cost of the course the grant should take into account the benefit to the student and the taxpayer.  Nevertheless the attack is clearly on cheap low-quality courses being sold at a high price for profit, a theme picked up in recommendation 3.7 which suggested that, unless the “problem of recruitment to courses which have poor retention, poor graduate employability and poor long-term earnings benefit” is addressed by 2020/23 the government should intervene either by restricting student loans to cases where the borrower has achieved official entry standards or by capping the numbers on certain courses.

The most politically contentious area on the finance side is the package offered to students.  University fees and a means tested figure for living costs, which can be as much as £11,672 a year for those studying in London, are typically financed through a loan package under which repayment only begins when income exceeds £25,000 a year and ceases altogether after 30 years.  That restricts the amounts paid by lower earners (often to nothing) but the attractiveness of the package to those who hope to repay their loans depends largely on the interest rate.  Currently this is 3% above the rate of inflation during the period of study.  After that all loans increase at the rate of inflation but interest additional to that only begins when earnings are over £25,000 and reaches the full 3% when they are £40,000 a year.

It must be depressing watching your loan go up by 3% above inflation while you are still studying and this aspect of the package has come in for heavy criticism.  The report suggests that interest should be limited to RPI until the post study period.  To compensate for that it is recommended that the £25,000 threshold be reduced to £23,000 (with corresponding reductions in the higher threshold) and the repayment period before the debt is written off should be extended from 30 to 40 years.  Bearing in mind the successful graduates make much of their income later in life that should add to repayments.

The trouble with extending the repayment period is that people who repay their loans late will bear more interest, much of it at 3% above the rate of inflation.  To make things fairer, therefore, the Panel proposed limiting the total repayment to 1.2 times the amount of the loan in real terms.  That is scrupulously fair but perhaps too much of a complication when those who see their earnings strengthening could borrow commercially to pay off the balance.

Finally, the Panel recommended a rejigging of the maintenance loan system which would see maintenance grants for disadvantaged students with a maximum of at least £3000 a year.

Take a bit here.  Give a bit there.  The Panel has given careful thought to creating a package which works for the various stakeholders and no doubt many of the proposals will be accepted.  It does not, however, purport to deal with the central political question of how the cost of tertiary education should be split.  Is it right that the state pay about half or should it pay more?  When Mr Blair came to power in 1997 his recipe for a better society was “Education, Education, Education”.  That is right now as it was then and although in the modern world students must bear some of the cost it is important that they are not put off participating in a program which is clearly in the national interest.  Expect a shift of the burden back to the taxpayer over the next few years.


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