How should England fund HE?

Published: 4 July 2017 at 11:25

Whatever your political persuasion there is absolutely no doubt that the Labour Party’s election promise to drop tuition fees in favour of “free at the point of delivery” higher education has reignited the smouldering issue of how England funds HE.

Rather than wait for another debate during a compressed election cycle, it seems timely to reconsider the current approach during this post-election mood for change.

Whilst there is much criticism of the current system, it has supported significant widening of participation in higher education, enabled the UK university system to remain relatively well funded and linked very clearly the benefit that individuals receive from higher education to payment to support the system. These very significant benefits should not be forgotten in a rush to address public concerns regarding increasing levels of student debt. The current student demand-driven system has delivered for the country, not least in that it has enabled much greater participation, in particular from those communities that have historically been under-represented in HE. It would in my view be a retrograde step to remove student-driven demand from the English system and one of my major concerns with a return to fully free at the point of delivery HE would be a trade off to return to a capped and controlled system. This would stifle innovation and likely result in backward movement in widening participation. If the view is that there is a problem with sustaining funding for a fully demand-driven system then perhaps a hybrid option where student demand still drives funding but that there is a limit on growth - for example any individual provider could only grow by say 2% per annum maximum - could be considered?

Any funding system must recognise that there are both appreciable private benefits in attending university and much public good in both having a highly educated population and a flourishing and vibrant university sector. One of the challenges with the current loan system is that debate has focussed on the private benefit at the expense of conversations regarding public good. In the minds of many the loan is seen as the state no longer contributing to their education at all - a position that in reality is far from the truth. Alongside government providing additional direct funding for a range of high cost degrees, the majority of students will never pay their loan off in full. Student loans are written off after 30 years and although there is debate about the exact costs of the write off, it is estimated (by the Office for Budget Responsibility) that this could amount to between 0.2 and 0.25% of GDP. Conservatively 25% of annual lending will never be repaid, an estimate that some have put at nearer 40%. So overall the system does recognise that there is a public benefit - it is just lost in the system.

The issue of charging real interest rates is significant and in my opinion simply wrong - at most we should be seeking to recover wage inflation alone and perhaps only bank base rate. A student studying for a three-year degree who takes on a maintenance loan of £6,000 per annum would graduate with a loan balance of nearly £46,000. The current interest rate for an undergraduate loan is between 1.6% and 4.6% depending on income (reaching the maximum at an income of £41,000). A graduate earning £41,000 with this debt would be paying back £1,800 per annum and facing interest payments of £2,116 per annum - the debt will rise rather than ever be paid off! If we look at a nurse graduating with a student loan balance at this level, then things are no different. At a starting salary of maybe £23,000 they will repay £180 per year and yet be incurring interest payments of £736 per year. To break even on payments a graduate with this sized loan will need to be earning £44,500, a salary level enjoyed by less than 12% of the population. To repay in full over 30 years then you would need to secure a salary of at least £52,500 - this would put you in the top 10% of earners.

What would be the components for an ideal system?

  • Any new system must be sustainable in the long run for both the State and individual students. This will require cross-party consensus and a commitment to put in place funding mechanisms that are likely to be supported for tens of years at a minimum.
  • The approach to funding must be transparent. Universities have complex and multi-faceted missions. Students who study in the environment that these missions create benefit directly from the educational mission, but also from research and innovation activities and the wider community engagement that almost all undertake. We have to recognise that any university funding system must support this range of activities, the question is how should this be done and how transparent should this be for students and funders? This opens another question as to whether new providers of HE, whose mission may not be as broad, should be funded at the same rate?
  • The system must recognise the public good and private benefit of the wider university system. Those who do not attend university should not be expected to cover the costs of the private benefit gained by students but at the same time students should not be expected to cover the costs of the wider public good. It seems perverse that under the current system all students are expected to pay for public good initiatives such as support for schools and widening participation schemes.
  • Any new system must be flexible and foster educational innovation that supports students across a career. A major challenge for the current system is that it is built around a model of education and skills development that is driven by school leavers attending university and then some progressing on to postgraduate study. It is relatively rigid and does not inherently support the levels of flexibility that would allow for real innovation.
  • It must not be administered or communicated as a loan that limits mortgages etc.
  • A new system should reward those who stay in the UK and use their education and skills for national benefit, especially in public service. This, if designed well, could remove the criticism of the loss of bursaries for health professional students for example.
  • Any new system must not result in a deterioration in the quality of the English university system through overall funding reductions.

What does a new system look like?

There is no perfect system and many national governments are grappling with how they fund higher education and the wider university system. Our current approach is, at least in my view, unsustainable. There is a real opportunity for England to develop a hybrid that builds on the successful changes that the current system has delivered but acknowledges the appreciable downsides. An approach that looks to the key components highlighted in the preceding paragraphs should be developed urgently. This is likely to involve some of the following:

  • Individual learning accounts which would be flexible but capped over a lifetime
  • A tiered graduate tax
  • An approach to university funding that sees the private benefit components coming through the learning accounts pathway and the public good aspects funded directly from government
  • Preservation, as far as is practical, of the notion of student-led demand in providing places.

This will not be easy, and a final system will inevitably require some compromise, but that must not deter us from arguing strongly for a long term sustainable solution that supports both individual students and the wider nation.


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