SOME with jubilation, some with trepidation: freshers on campuses across England have just begun their university careers. They are a relatively lucky lot. As Britain limps out of recession and jobs remain scarce, higher education makes an appealing alternative to the dole queue; many people who would normally have earned a place have been denied one. Even before the downturn, demand outstripped supply. Finding a way to accommodate this pent-up demand even as public spending is squeezed is likely to prove controversial, and potentially destabilising, for the Conservative-Liberal Democrat coalition government.
Five decades ago, when just 5% of youngsters entered higher education, the state paid not only for their tuition but also for their living expenses, including beer money. Now that 45% of young people do so, things have changed. A series of botched reforms by successive governments that were supposed to pave the way for the country’s transition from an elite to a mass system have left universities unable to enroll all the students who qualify.
Tony Blair’s government introduced university tuition fees in 1998. This year, a student enrolled at an English university must contribute £3,290 towards the costs of his education—which, on average, is less than half of the actual annual cost. The state pays the difference (at least notionally: some universities complain that they are left out of pocket). The state also lends students the money to pay their fees and living expenses, charging no interest on the loans in real terms and recouping what it can after the students graduate and are earning more than £15,000 a year. Small wonder, then, that even before the coalition starts to slash public spending, the state can’t afford to let universities admit as many students as they would like.
A way out of this fix is due to be outlined on October 12th by an independent review of higher education and student finance, headed by Lord Browne, a former head of BP. The review is expected to suggest that graduates should pay more so that taxpayers can pay less. Lord Browne is likely to recommend that the maximum annual tuition fee—perhaps to be rebranded as a “graduate contribution”—should rise to £7,000 or more (leaving some universities free to charge much less). That is close to the average actual cost of teaching an undergraduate.
If that hike were implemented, it could cost the state a lot, because it would still be lending most students the money to pay the increased fees (about 80% of the 960,000 students eligible for such loans currently take them). So Lord Browne will probably also recommend that the government charge a proper rate of interest on its loans. Nick Barr, of the London School of Economics, calculates that, under the present system, students pay back only two-thirds of the real cost of their loans. He reckons the main beneficiaries are successful professionals, who cease paying for their degrees ten years after graduation, rather than the 12 or so years it would take should real interest be charged.
These adjustments would dramatically increase private spending on universities. At almost 50%, that already forms a higher proportion of the total expenditure in Britain than in many other members of the OECD, a club for rich countries. Yet Britain spends just 1.3% of its GDP on higher education, lower than the OECD average (see chart); since students are the main beneficiaries of their degrees, they are the obvious sources of additional funding.
Sensible as the review’s suggestions might be, however, they may prove difficult to enact—because the Lib Dems promised to abolish tuition fees in their election manifesto and have secured the right to abstain from any vote on legislation arising from the Browne review. Most Lib Dems favour a graduate tax, under which graduates would pay more tax than those who had not completed a degree. Vince Cable, the business secretary who is also responsible for universities, has tried to smooth the path to this solution by describing the existing system as “a form of graduate tax” (it can more accurately be called a defined graduate contribution, perhaps, because graduates pay only what they owe, rather than indefinitely).
The graduate tax has obvious drawbacks. It would encourage students to quit before they graduate or to move abroad afterwards. It is hard to see why some students should pay more than others for the same service. And well-paid graduates already contribute more than others via income tax. A graduate tax would also leave universities largely reliant on state funding, whereas raising fees would boost their financial independence. (Another idea, supported by some universities but vulnerable to similar objections, would be to charge high-earning graduates a steeper interest rate on their loans.)
If the government were to invent an emollient new name for tuition fees, and guarantee that payments can still be deferred until after graduation, it might be able to pass legislation that would permit fees to rise. That would alarm students (and parents) unaccustomed to the idea of taking on such daunting levels of debt. Some graduates would end up paying for their education for much of their working lives.
There is an even more uncomfortable possibility, however. On October 20th, when it announces the results of its spending review, the government is expected to slash its direct funding of university teaching. The cuts will be made in anticipation of the revenue that Lord Browne’s plans would raise if they were adopted. What worries Steve Smith, head of Universities UK, which represents vice-chancellors, is that the Lib Dems might block the reforms, leaving universities with a huge shortfall. If that happens, many more would-be students will miss out.