The UK Government has a large structural budget deficit. Whichever party wins the next general election, it is clear that it will either cut the real value of government spending or at least have very modest real growth rates. Higher education will be a tempting target for slicing “efficiency gains”. Indeed, the Higher Education Funding Council of England announced a cut of roughly 1% on 13 May 2009. From July 2009, it has been consulting on a further 1.2% reduction that they may introduce in 2010-2011.
Given the state of the public finances, the government may eventually have to reduce its various contributions to the tuition chargeable by universities some 10% to 20% (in real terms). In the long run, that would threaten the quality of English undergraduate education, which could in turn inflict lasting damage on one of the UK’s most successful sectors – a sector that also generates a large volume of exports.1 It would likely make the UK poorer, economically and culturally.
Some university leaders have suggested that student tuition fees, funded through “income-contingent loans” supplied by the government, should rise to make up for any shortfalls in underfunded teaching costs.2 Rather surprisingly, under the current funding model, an increase in the level of tuition fees in fact increases public sector debt. I will explain why and what might be done about this to mitigate the rise in national debt. The most important mitigation is to remove the interest rate subsidy graduates receive on their tuition loans. Barr (2004) has demonstrated that this subsidy is very expensive and an inefficient way of providing financial support to higher education students. I entirely agree with him that it should be removed.
In CEPR Policy Insight 42, I argue that the UK Government should go further. I think the Government should allow universities to charge their graduating students additional fees if their teaching costs are not met by the current total tuition payment. I will call these “deferred fees” or income-contingent tuition fees. Deferred fees are additional teaching fees due to the university. They can be paid to the student’s university either
- upfront by the parents of the student (or the students themselves), or
- by the graduate once his/her income rises above a defined threshold and once their national maintenance and tuition loans are repaid.
If the graduate’s income is not sufficient to make the repayments during their career, the fee is forgiven. Note that the university would not be given extra upfront cash by the state or the Student Loan Company. This means that such fees are neutral on the fiscal position of the state, the size of the Student Loan Company’s loan book, and the financial position of the universities that do not introduce such fees. The implications of variable deferred fees for fee caps, charitable giving, means testing, and student debt are discussed in the Policy Insight.
1 Throughout I will discuss solely English universities. However, the same type of structure is broadly in place in Wales and Northern Ireland and also applies to English students who study at Scottish universities.
2 For example, in March 2009 Sir Roy Anderson, Rector of Imperial College, advocated the tuition fee cap should rise by between £3,000 and £6,000.
Barr, Nicholas (2004), “Higher education funding,” Oxford Review of Economic Policy, 20, 264-283.
Shephard, Neil (2009), “Income contingent tuition fees for universities”, CEPR Policy Insight 42.