Who should pay for university education and when – the student, the taxpayer, the employer or all three?

Rebecca Boden
The author is the programme director of New Social Research.

"In the UK, the fees regime offered an appealing method that did not increase officially recorded public expenditure. It was justified by partial economic arguments (that the student benefits so the student should pay). The fees scheme ignores the wider social and economic benefits derived from university education, and denies government the ability to effectively control the system, maintain quality or, to a large extent, prevent fraud."

Alustus! Over the past twenty years, England has progressively introduced very high tuition fees for those studying for an undergraduate degree. Despite being subject to much controversy and criticism, this approach is now being considered in other European countries, including Finland. This article describes the history of the English scheme, the problems it has encountered and considers a possible, less disruptive, alternative.

Through their teaching work, universities meet important individual, social, cultural and economic needs. They are part of a complex network of students, employers, taxpayers and government. Because university education is so important, it is frequently funded and regulated by the state.

The benefits of university education are widely distributed across a variety of individuals institutions and organisations. These include the students, who usually get better jobs with higher salaries, but also society and the economy, which get more highly- skilled people. So a doctor may benefit from a better job and higher salary as a result of their university education, but patients also benefit from having a doctor to look after their health needs.

There can be long and unpredictable time delays between the period of education and when and where the benefits arise. The distribution of benefits and the time delays in getting them make it impossible to accurately quantify who benefits from university education, by how much and when. This needs to be considered when we think about who should pay for university education and when – the student, the taxpayer, the employer or a mixture of all three?

The English system

From the 19th century until the late 1990s, UK universities were all private, not-for-profit (meaning no-one could withdraw profits from them), charitable organisations receiving the overwhelming majority of their funds from the state. By the 1990s, UK and other EU undergraduate students paid no tuition fees and received generous means-tested maintenance grants to cover their living costs (Anderson 2016).

From the early 1990s onwards, there was a rapid expansion in the numbers of universities and students aimed at upskilling Britain to meet the challenges of the knowledge economy. This also increased costs significantly at a time when government was ideologically committed to reducing both taxes and public expenditure. To mitigate this, from 1998 the funding of undergraduate education in England (Scotland, Wales and Northern Ireland have separate systems) was gradually radically transformed to a system where universities now receive virtually no state funding for teaching. Instead, UK and other EU students now pay ‘full fees’, currently limited to £9250 (roughly €10000) a year directly to their university. Universities may charge less than the full fee, but virtually none do so.

Students can take out government loans (the government borrows the money itself) to cover their tuition fees and living costs. These loans start accruing interest immediately; the yearly interest rate is currently set at 6.1%. However, the students do not start making repayments until they have left university and their income reaches £25000 a year. The repayment rate is 9% of yearly income above the £25000 threshold. If the loan is not entirely repaid within 30 years of graduation then it is forgiven. Students leave university with an average of €60000 debt. Universities can charge non-EU students whatever they wish and the fees are frequently over €20000 a year.

Why this system?

The main justification for this new system is the so-called the ‘graduate premium’ – the extra amount that the average graduate earns over their lifetime compared with a non-graduate (Barr 2004; Greenaway and Haynes 2003). As numbers of graduates have increased, so the graduate premium has declined. The economic justification for fees is that because, on average, graduates earn higher salaries than non-graduates, they should pay for their own university education. UK economists decided to ignore the social and wider economic benefits of having a well-educated citizenry because this was too hard to calculate (Barr 2004; Mishkin and Straub 2014). Making the loan repayments contingent on income after graduation and eradicating debt after 30 years was seen as the best way to cope with the fact that there is a high variability in earnings between graduates and the benefits they get may not arise until much later in life. The argument was that this means that the debt is only repaid when the student has a material benefit (although it’s rarely possible to prove that the degree was why the person earned more money).

Government borrows the money that it lends to students. Because these are loans not public expenditure, the money is not recorded as government spending and this makes the UK look better in terms of state finances – government is ‘spending’ less. At first, government had to limit the number of students that universities could enrol because otherwise its borrowing to finance the loans would escalate out of control. But then it decided to securitise the student loans – basically to bundle them up together and sell them to private investors and banks. This is one of the reasons that the interest is so high (currently 6.1%) – a fat interest rate makes the banks more likely to buy to loans because they get a good stream of future revenue from them. The loans are sold at a discounted price because of the very real risk of the money never being repaid (Allen 2017). The sale of student loans brings in extra money to government and this enabled government to remove the limit on the number of students going into university ((CM8747 2013).

This financial reform allowed government to achieve a long-cherished aim of substantially privatising and marketising university education. Until 2010, under the previous funding system, only recognised universities that were public institutions could receive government money directly. This kept a tight control on those organisations that could receive public cash. However, now loan-funded students-as customers pay the cash that they have borrowed to universities and are allowed to use their loan money on any government-approved programme they wish, whoever runs it. Approval of programmes and those who provide them is now a weak process; this is not public expenditure and ultimately the student will be liable to repay the loan so, the argument goes, government is not ‘giving’ money to anyone.

The new regulatory control system set up by government in England from 2018 is relatively weak and market-oriented. Thus the mission of the new regulator, the Office for Students, is to ensure ‘value for money’ for students-as customers.

Private capital is always eager to rush in when a new group of cashed-up customers emerges. New private, for-profit universities have been formed and many of these private providers (as these new market entrants are called) work in partnership with existing universities, offering subcontracted teaching programmes. The existing universities cooperate as they make money out of these schemes too by way of payments from the private providers. Private providers are mostly regular commercial companies seeking a profit for shareholders. These private providers are frequently owned by financial investment vehicles, sometimes situated in tax havens.

The financialisation of the funding of higher education is changing the university landscape substantially, enabling private profit-taking and effectively leaving the development of education in the hands of the consumer choices of students-as-customers. By 2017 total student loan debt in the whole of the UK reached £89.3billion (more than €100 billion) (Bolton 2017). Of this, students of private providers owed at least £100 million (€110 million).

The system as it has developed has significant problems.

• Young people now leave English universities with an average student debt of €60000.

• The level of indebtedness is likely to adversely affect those from poorer families, who are less confident about repaying the money and worry about being burdened with debt for up to 30 years. There is evidence that they are deterred from going to university and this affects social mobility (NAO 2017).

• There is a very large debt default rate – students go missing for instance and cannot be pursued for payments. This is particularly the case with students from the rest of the EU.

• The UK government that, because of low earnings and the income-contingent nature of repayments, up to half of the debt will never be repaid and be eventually forgiven by government.

• Student finance is changing the nature of English universities. Students increasingly act as customers, not members of learning communities. When they are dissatisfied, they bog universities down with consumer legal actions. The paying environment affects the learning relationship with academics, who are sometimes seen more as customer service operatives than as teachers.

• Fear of debt drives student choice of degree subject. Business studies is increasingly popular (especially amongst students from poorer families) because it is seen as a route to a well-paid job. This means more traditional humanities subjects in universities, such as history or languages, are being scaled back, losing jobs and important societal skills and knowledge. There appears little understanding that, for example, a degree in history might be a better route into becoming an accountant than a degree in accountancy.

• By allowing the market (which basically means 18 year old students worried about money) to determine how many of each sort of graduate is produced, government has lost its ability to steer the overall skills mix in the economy and society. Important but lower-paid jobs, like teaching and nursing, are increasingly less attractive to students. Universities then cut back or close these departments because they can’t afford to run them. So government puts a lot of money into student finance (it will get back less than half of what it puts in as loans), but has no overall control over outcomes.

• The quality of educational provision is now extensively assessed by students’ satisfaction as customers. This has led universities to plough money into ‘the student experience’, including new gyms or residences in an appeal to lifestyle desires. Some staff have reported being unable to challenge students’ behaviour or even challenge them intellectually, for fear of being scored badly. Soon, judgements of teaching quality will influence universities’ ability to charge even higher fees under the Teaching Excellence Framework.

• Government has lost effective control over how universities use their newly-increased incomes. There have been many scandals around rectors paying themselves excessive salaries of around half a million euros a year, and management systems becoming bloated with marketing managers and HR staff.

• As private providers have flooded in, student finance has become the target of fraudulent activity. A November 2017 BBC TV exposé demonstrated that it is comparatively easy to recruit fake students who apply for loans for fees and maintenance costs as students of private providers. In fact, no education takes place. The fees go to the private provider and the ‘student’ keeps the maintenance element. These loans are unlikely to be ever repaid because the ‘students’ will never earn enough. Progression from year to year is achieved by setting assessments as written coursework only. There is a flourishing business sector operating in the UK that provides assignments to order, for cash.

• The securitisation of significant amounts of student debt may lead to another lending crisis of the sort experienced in the US with sub-prime mortgages.

In England student fees have bought many challenges and will bring many more in future. Evidence suggests that the scheme is costing government dearly – both financially and in terms of the quality and nature of higher education provision. These problems may be unavoidable once students pay fees and are thus ‘paying customers’.

Expanding higher education is desirable but does bring the financial difficulty of how to pay for it. In the UK, the fees regime offered an appealing method that did not increase officially recorded public expenditure. It was justified by partial economic arguments (that the student benefits so the student should pay). The fees scheme ignores the wider social and economic benefits derived from university education, and denies government the ability to effectively control the system, maintain quality or, to a large extent, prevent fraud.

A simpler solution, which I favour, is for government to fund universities directly as a social good but to implement the so-called ‘graduate tax’. This would be a small increment on marginal tax rates for those with university degrees. It would take longer for government to get its money back (and graduates who move abroad would escape), but government would have a vested interest in ensuring that the quality of higher education was kept high and that degrees were relevant. Rather than the current scheme, where students are required to invest individually in their own future, government would invest in its young citizens and take a small share of the individual’s rewards to offset the costs.

References

Allen K (2017) UK government revives landmark student debt sale, Financial Times, accessed on 15/4/2018.

Anderson R (2016) University fees in historical perspective, History & Policy Policy papers, accessed 8 September 2017.

Barr N (2004) Higher education funding, Oxford Review of Economic Policy, 20, 2, 264-283.

Bolton P (2012), Education: Historical Statistics, Standard Note SN/SG/4252, London: House of Commons Library, accessed 15/4/2018 .

Bolton, P. (2017) Student Loan Statistics, House of Commons Library briefing paper 1079, London: Houses of Parliament, accessed on 15/4/2018.

CM8747 (2013) Autumn Statement 2013, accessed 23/2/2016.

Greenaway D and Haynes M (2003) Funding higher education in the UK: the role of fees and loans, The Economic Journal, 113, 150-166.

Mishkin E and Straub J (2014) The redistributive effects of British subsidies to higher education, Social Policy and Society, Published online 6 February 2014.

NAO (2017) The Higher Education Market, London: National Audit Office, accessed on 15/4/2018.