Squaring the Circle of Quality, Affordability and Access in Higher-Education Funding

UK Policy Education

Squaring the Circle of Quality, Affordability and Access in Higher-Education Funding

Commentary
Posted on: 29th November 2021
By Multiple Authors
Steve Coulter
Head of Industrial Strategy, Skills and Sustainability
James Scales
Skills and Future of Work Lead

It looks like big changes to higher education and student finance are in the offing. To save money the government is looking to overhaul the student loans system. But there are better ways to achieve its goals than the ideas being floated.

Student numbers have soared since the 1990s, financed by the introduction of loans to cover tuition fees that have risen to a ceiling of £9,250 a year. But the low earnings of some graduates means 53% of the value of these loans has to be written off, and the government seems worried about the affordability of the system and the unfair burden on non-graduate taxpayers who pick up the tab. Neil O’Brien, who is in charge of the government’s levelling up agenda, point outs that far more students in Red Wall seats study technical subjects at underfunded Further Education colleges than go to university.

One of the ideas being floated is to substantially lower the repayment threshold for graduates, currently £27,295, so those on lower salaries than at present will have to contribute. This would save money and would allow government to redeploy savings to the FE sector to grease the wheels of its levelling up agenda.

But it would come at the cost of harming graduates’ cash flow at a time when cost-of-living pressures are biting. And if the measures are applied retrospectively to graduates with existing loans, this would prove even more controversial. There are better ways of clawing back a greater contribution from graduates that put less immediate affordability pressure on them and are less regressive.

This latter point is reflected in the chart below, which adapts IFS modelling to show the effect of lowering the earnings threshold to a notional level of £24,000, alongside an alternative policy of extending the repayment period by just 5 years, from 30 to 35. In both cases, when using DfE indicators, the total annual cost saving to government is around £1.5 billion, while 7 percentage points are shaved off the RAB charge (the long-run cost to government of writing off unpaid loans).

TBI analysis using IFS Student Finance Calculator

Another widely mooted cost-saving measure is to cut the tuition fees, and therefore the associated loans. This is partly based on a view that universities have done well financially in recent years. But, in practice, most universities are not swimming in cash: teaching resources per student in England have fallen modestly due to real-terms declines in tuition fees (the tuition fee cap has been held constant) and government teaching grants. Universities also face several other funding pressures, including eye-watering pension deficits and depressed revenue from conferencing during the pandemic.

So, if they go down the route of cutting fees, the government should compensate universities for any lost revenue by boosting teaching grants. Reducing resources for universities would undermine course quality at a time when we should be investing more, not less, in education to cope with a rapidly changing labour market, as well as damaging universities’ efforts on student outreach.

And while a cut might ostensibly look attractive to students (what’s not to like about lower fees?), it would in fact only benefit higher-earning graduates. The chart below illustrates this point in relation to a lowering of the fee cap to £7,500, for example. It seems a strange time to cut university funding in order to save money for the highest-paid graduates in the workforce.

TBI analysis using IFS Student Finance Calculator

There are no easy choices here if the exchequer wants to save money. But the priorities should be maintaining student numbers and universities’ teaching and research quality, which is important for the economy, while continuing to improve access, an important ingredient in fostering social mobility and levelling up, as recent research has underlined.

One way of achieving these aims contemporaneously is to raise more money from graduates by extending the loan repayment. The money raised could be split between topping up the recent increase in funding for the under-resourced Further Education sector and introducing maintenance grants for highly disadvantaged students. That’s something we could all live with, surely?

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