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Higher education: the times they are a-changin’

14 May 2010

In a recent blog, Campaign for Science and Engineering (CaSE) acting director Hilary Leevers welcomed two “strong, respected and thoughtful advocates for science and engineering” to the new government’s front benches. She was referring to the appointments of David Willetts, as minister of state for universities and science at the Department for Business, Innovation and Skills (BIS), and Vince Cable as secretary of state for BIS.

As Dr Leevers observes, Mr Cable studied natural sciences with economics at Cambridge and, while his background is not in the sciences, Mr Willetts has a good track record on science issues in his former roles as shadow secretary for Education and, latterly, Innovation, Universities and Skills. In particular, his commitment to delay plans to make university research funding dependent upon economic impact saw his popularity flourish among higher education system support groups such as the University and College Union (UCU). And like the previous incumbent, Lord Drayson, Mr Willetts will have a place at the Cabinet table, a decision that was not foreshadowed in either the Conservative or Liberal Democrat party manifestos, and one that is also welcomed by both CaSE and UCU.

UCU general secretary, Sally Hunt is particularly concerned about what she refers to as the ‘marketisation’ of our further and higher education systems. She believes this will create profound social inequality and threaten the UK's global academic reputation. On Mr Willetts’ support for the integrity of university research funding and its commercial independence, she said that the academic community made clear its view that assessing and funding research according to economic impact is unworkable and urges him to put an end to this “sorry chapter” once and for all. Ms Hunt also invites Mr Willetts to listen to the ever-widening consensus of opinion opposing cuts in college and university budgets, caps on student numbers, the privatisation of academic institutions and increases in the cost of a university education for hard-working families.

Back in 2007, when he was shadow secretary for Innovation, Universities and Skills, David Willetts nailed his colours to the mast on the subject of university funding: “It is important that science is funded properly,” he said. “It should not be about the government picking winners; it should be about supporting academically excellent research centres.” But he has a hard task ahead of him, reconciling the harsh fiscal measures to be taken in the imminent emergency budget with the current state of university finances, laid bare last week by The Russell Group, which represents the UK’s top twenty research-intensive universities.

The first of The Russell Group’s independently-researched reports into the under-funding of higher education -
Staying on top: the challenge of sustaining world-class higher education in the UK - outlines the dangers of under-investment in Britain’s leading research-intensive universities and the wider implications for the health of the UK economy. Russell Group director general, Wendy Piatt offers a stark warning:

“The UK now stands at a crossroads; without more investment in higher education, the UK risks jeopardising the competitive advantage which has made its universities the envy of the world. University under-funding also has serious consequences for the nation. As the UK’s economic competitiveness becomes increasingly dependent upon high-tech industries and skilled graduates, our leading research-intensive universities will be of increasing and crucial importance in driving future growth and prosperity.

“UK universities currently punch well above their weight in the international sphere. But research-intensive institutions are under-resourced in comparison with their international competitors. While universities in the UK are bracing themselves for a period of austerity and uncertainty, other nations are rightly pouring investment into their universities at this key time before the world economy picks up. With funding reductions and the prospect of future cuts to manage, without clear means of increasing their income, meeting these challenges begins to look like an impossible task.”

The system of higher education finance in England is currently being reviewed under the chairmanship of Lord Browne, whose committee is due to report to government in the Autumn. In their own submission to the review, the Institute for Fiscal Studies (IFS) recently highlighted some of the trade-offs that would be involved in reforming the current system of fees and loans applying to full-time undergraduate study in its report,
Future arrangements for funding higher education.

Under the current system, IFS analysis reveals that for every £1 loaned by the government to students to cover maintenance and fees, the taxpayer contributes 23p, or around £4,800 per graduate. The IFS suggests that if the government were to charge an interest rate on loans equal to the government’s cost of borrowing (2.2%), this would save the taxpayer money. On average, the subsidy would fall from 23p per £1 loaned, to 10p per £1 loaned. The remaining subsidy would arise because all student debts are written off after 25 years.

The break-even interest rate (the rate the government would have to charge in order to have a zero-cost system) is around 3.45%. Interest rates higher than this would, assuming graduates did not change their repayment behaviour, be profitable to the exchequer. If the government were to raise the fee cap – and provide a fee loan for the same amount – this would cost the taxpayer money. This occurs mainly because an increasing number of graduates will reach the 25-year threshold without having paid off the full value of their loan. For example, if the average tuition fee rose to £5,000 from the current £3,200 fee cap (at 2011 prices), the average loan subsidy would increase from £4,800 per graduate to £6,900 per graduate.

The IFS says that this cost could be reduced by increasing interest rates in conjunction with increasing fees; for example, charging an interest rate of 2.2% would result in the subsidy falling to £3,600. But the interest rate required for the loan system to be revenue-neutral rises steeply with the level of the fee.

Other parameters of the loan system can also be adjusted to achieve the same subsidy as the current system or a lower one, with or without increasing interest rates and/or fees. For example, changes can be made to the repayment rate, the number of years after which debt is written off and/or the threshold at which people start repaying. There are many combinations that the government could use to alter its costs.

More regressive ways of raising revenue include increasing the repayment rate, lowering the repayment threshold and/or increasing the debt write-off period beyond 25 years. More progressive ways include increasing the interest rate in conjunction with lowering the loan repayment rate, and/or making graduates pay for a further period of time after they have paid off the full balance of their loans. For example, under the current £3,200 fee cap, a zero-subsidy system could be achieved by imposing a 5% real interest rate and a 5.8% repayment rate, and this would give the biggest taxpayer subsidy to the lowest graduate earners.

Alternatively, the government could choose to introduce new features to the current system in order to save money. One such example is to offer students a discount for up-front payment of fees or early repayment of their loans. In order for such a system to be profitable for the exchequer, however, graduates who would actually lose out financially by taking up the discount would need to be induced to do so.

Many of the reforms considered in the IFS report involve increasing graduate contributions to the cost of going to university, resulting in important behavioural change consequences. These could take the form of graduates making overpayments to reduce their debt or students declining to take up loans, or indeed deciding not to participate in university at all.

Higher interest rate payments on student loans and higher tuition fees are possibly the last things that students want to hear about, let alone UCU’s Sally Hunt and CaSE’s Hilary Leevers who will, no doubt, be bringing the subject to the attention of members of the new coalition government, including David Willetts. The dangers presented by such hikes in fees and interest rates are all too apparent and the IFS cautions policymakers to beware of negative outcomes, particularly the risk of wholesale non-participation in higher education courses.

We may be averse to university research funding being dependent upon its economic benefit to society, but taking that ‘research for research’s sake’ into the wider academic portfolio, dare I suggest that it is time to start favouring, by means of fiscal incentives, only those courses that are likely to benefit the UK economy in the longer run? Do we necessarily want to run the risk of losing aspiring science and engineering graduates simply because they cannot afford the cost of their education? And just how fair would a system be that favours science and engineering undergraduates over, say, students of economics and political science, in terms of the fees and loan interest rates they are charged? Questions that will beg answers sooner than we might like.

Les Hunt

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