Higher Education Policy Institute (HEPI): How should undergraduate degrees be funded? A collection of essays

The collection, edited by Rose Stephenson, HEPI director of policy and advocacy, features introductory remarks by Lord David Willetts, Minister for Universities and Science, 2010 to 2014. This is followed by a series of five essays outlining the shortcomings of current funding systems and proposing alternative scenarios, written by Chloe Field, Vice President Higher Education at the National Union of Students (NUS); Lord Jo Johnson, former Minister of State for Universities and Science (2015), then Minister of State for Universities, Research and Innovation, 2016 to 2018; James Purnell, President and Vice-Chancellor of the University of the Arts, London; Johnny Rich, Chief Executive of the Engineering Professors’ Council and Chief Executive of the outreach organisation, Push; and Reform Scotland. For each scenario, London Economics assesses the predicated impact on the Treasury, higher education providers and applicant behaviour, the latter based on polling by UCAS.

The full report can be found here

At-a-glance:

• There is little political support for increased public funding of higher education – apart from bringing back some means-tested grants (Lord David Willetts, p6)
• The current model which funds students first and then expects them to pay back is a sensible midpoint between a full market model and depending entirely on public spending and taxation (Lord Willetts, p15)
• A tax system which identifies a particular personal characteristic or attribute – such as being a graduate - and then taxes accordingly is very unusual for a liberal democracy (Lord Willetts, p16)
• There should be a quinquennial review in which all the variables in the system are considered. It should cover all graduates and allow retrospective changes to repayment details (Lord Willetts, p17)

Scenario 1

• Maintenance grants in England should be reintroduced, funded by a simple change to loan repayments that keeps higher earners in the system for longer (Chloe Field, p25)
• Tuition fees should be abolished, with higher education provision funded by government. In a stepped maintenance loan repayment model, repayment thresholds would be uprated with average earnings growth, with debt wiped after 31 years (Chloe Field, p26)
• This scenario would result in a very substantial increase in the total Exchequer cost of the system of about £10.50 billion per cohort. On the other hand, the Exchequer would save £423 million from the removal of fee loans and £2.34 billion due to higher maintenance loan repayments (London Economics, p26)
• 74 per cent of potential applicants would apply for an undergraduate degree under this scenario – 6 percentage points higher than under the current model (London Economics, p29) 

Scenario 2

• The level of tuition fees paid by students should be related to the quality of education. Inflationary uplifts through the TEF, would mean Gold and Silver rated providers would be able to charge fees of around £12,200. A system which links funding to outcomes aligns the interests of students, taxpayers and providers (Lord Johnson, p33)
• 100 per cent taxpayer funding of university fees would put unsustainable pressure on public finances and see the return of student number controls, while a graduate tax will cause a flight to overseas universities of talented students fearful of a lifelong levy (Lord Johnson, p34)
• This scenario would result in a small increase in the Exchequer cost of £59 million per cohort (3 per cent). Higher education institutions in England would benefit from an additional £271 million in net income per cohort. The average graduate debt would increase by £800 to £51,300 (London Economics, p37)
• 41 per cent of potential applicants say they would be likely to apply to university under this scenario (compared to the 68 per cent baseline). Students said the model would “make it so only the wealthiest can attend prestigious universities” (London Economics, p40)

Scenario 3

• Under the current loan repayment system, the heaviest burden of all falls on middle-earning graduates; a nurse pays back more than a banker. The student loan system could be replaced with a graduate tax, tied to income, which no wealthy graduate would be able to pay their way out of (James Purnell, p46)
• Alternatively, a stepped repayment system, with real interest rates, could be introduced so higher earners would be obliged to make repayments for more of the maximum repayment period, which would subsidise a shortfall in repayments from low and middle-earning graduates (James Purnell, p46)
• Scenario 3 would generate large Exchequer cost savings of approximately £841 million per cohort (42 per cent). The savings are driven by an increase in total fee and maintenance loan repayments. The RAB charge would decline by 4.6 percentage points, to -0.5 per cent (London Economics, p47)
• Average debt on graduation would increase by £1,600, to £52,100. 57 per cent of potential applicants said they would apply in this scenario (compared to the baseline of 68 per cent) (London Economics, p47)

Scenario 4

• A graduate employer levy scheme could replace the tuition fees and repayment system. Employers would pay a levy of 3 per cent of graduate earnings over £25,000 directly to the government. Students would borrow and repay maintenance loans on the same terms as currently, but, like their employers, students would pay just 3 per cent of everything they earn over £25,000 (Johnny Rich, p52)
• The graduate employer levy payments would be passed to the higher education institution where the graduate studied (Johnny Rich, p53)
• The graduate employer levy would result in very substantial Exchequer cost savings of approximately £8.03 billion per cohort. The expected Exchequer revenues from the graduate employer levy would far exceed the costs of fee grant, maintenance loan and teaching grant provision because the 3 per cent levy is applied to all graduate salaries over £25,000 and continues to be paid for the whole of a graduate’s working life (London Economics, p55)
• Seventy-eight per cent of potential applicants said they would enrol at university under this model (London Economics, p57)

Scenario 5

• While students do not pay tuition fees in Scotland, there are student number controls. A graduate contribution model in Scotland, starting at £5,500 per student, would be paid once students earn more than the Scottish average salary. The amount paid would be based on the amount earned (Reform Scotland, p70)
• Compared to the current Scottish funding system, a graduate contribution model would result in a small (2 per cent) increase in the Exchequer cost of the system. Higher education institutions would benefit from an additional £154 million in net income per cohort. The average debt on graduation would increase by £5,500 to £38,100 (London Economics, p73)
• Half of potential applicants said they would apply to university under this model, compared to the 75 per cent baseline under the current system (London Economics, p73)

Implications for governance:

Governing boards across the country will be grappling with the impact of current student funding regimes on their universities’ finances. 

A Universities UK commissioned report by PricewaterhouseCoopers (PwC) published early this year, and covered by an Advance HE governor news alert,  sets out the systemic financial challenges that higher education institutions are facing, from the structural constraints on their ability to generate income despite increasing costs, the heavy reliance on international fees to cross-subsidise domestic undergraduates, to the forced delay of long term investment in favour of more immediate priorities.

In a diverse sector, individual institutions will have varying degrees of risk exposure, and differing abilities to respond to such risks, or to absorb losses through existing cash reserves. Despite these variations, the financial sustainability challenge is undoubtedly systemic and is symptomatic of the current funding regime, according to Kitty Kent, associate director at PwC. 

In recent months, a growing number of institutions have announced measures such as restructuring, redundancies and course closures in a bid to deal with deficits.

The HEPI collection lays out the current stark situation and an even starker future. A contribution by Lily Bull, policy manager at the Russell Group, outlines modelling which suggests that if the current funding system remains unchanged, by 2030 English universities will be required to find an additional £6.5 billion to maintain the status quo in student numbers and R&D activity as delivered in 2019. This is in addition to the deficit the sector is already experiencing to deliver these activities. The shortfall for educating each UK undergraduate student would rise from £2,500 in 2022 to £5,000 in 2030 per student per year. 

To prevent this deficit, the government would need to increase undergraduate fees to £11,295 in 2024 and then in line with inflation each year and increase teaching grant funding by 6 per cent each year.

In opening remarks in the HEPI report, Lord Willetts recommends five yearly reviews that allow retrospective changes to the borrowing terms for all graduates, but defends the current model as “a sensible midpoint” between a full market model and an unacceptable burden on the taxpayer. 

The impact on applicant behaviours of the various options presented in the report will be of interest to governors. As might be expected, lower proportions of potential and current students say they would enrol at university when faced with higher tuition fees, a graduate tax or real interest rates. In scenario 2 where providers with high quality provision would charge higher fees, potential student participation falls from the 68 per cent baseline to 41 per cent.

Changes to the system also affect students’ expectations of where they will apply. Proposed rises in tuition fees, for instance, led to comments about only considering local institutions. In scenario 2, some young people felt they would be unable to afford the best universities, while others saw it as an investment. 

What may come as more of a surprise is that the likelihood of applying under the various models did not differ substantially depending on the POLAR quintile respondents were in.

The collection makes an important contribution to current discussions about possible solutions to the dire state of university finances in the months before a general election. 

However, as speakers at the recent Advance HE breakfast seminar pointed out, higher education is not a vote winner and other priorities will take precedence. Most commentators do not expect major HE policy decisions to emerge prior to the election and little action is anticipated in the first parliament. Many expect the next government to commission a review or inquiry. However, in his contribution, Lord Johnson argues that a big review is not necessary. His proposal for a mechanism to link funding to quality exists already in law in the Higher Education and Research Act 2017, which allows fee caps to be set at differing levels based on TEF awards, subject to limits prescribed by regulations. Other scenarios, on the other hand, are likely to require major overhauls or possibly new legislation. 

It is highly likely then, as governors are getting used to being told, that the current financial constraints they face will be in place for some time to come. But the HEPI report provides some insightful food for thought on how HE funding may be reformed in the longer term.