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What are David Willetts’ options for limiting spending on student loans?

We know from last weeks speech that David Willetts has got in place one of the tools he needs to control spending on student loans – he is all set to allocate to every university a quota of undergraduate students. A small pool of extra places will be held back for universities to compete for. Via this ‘core-margin’ model to which Willetts is warming, the Department for Business, Innovation and Skills will use existing legislation to dictate the total number of students in the English system. At least for now.

But that on its own is not enough. Because if most universities rush to charge £8,000 – £9,000 a year, then the average will be significantly more than the £7,500 a year that BIS has budgeted on. So in order to limit spending, the government would have to cut the number of student places. Despite longstanding murmurings among Conservatives that theres no need for so many graduates, there appears to be as yet no appetite within the Coalition to detonate this political bomb. Hence Willetts also needs a tool to limit net expenditure per student. How might he do this? My post yesterday prompted several (private) responses from universities making clear that this is an absolutely crucial question for their financial planning. So lets look at the options.

There seem to be two paths. These are to limit the level of fees that universities can charge. Or to allow the fees to be high but then to claw back some of the income so that the net expenditure is lower.

The claw-back option was highlighted by Scotlands (presumably well informed) education secretary, Michael Russell, this week. One way of putting it into effect would be to dust off the “levy” proposed by John Browne in his original proposals back in October. In this, the higher the fee charged, the higher the levy imposed by the government – ie the levy is in effect a progressive tax on tuition fee income. Browne was going to use the money to support poor students, but the government could simply recycle the money to pay for additional student loans.

Its a bit of a merry-go-round and one effect would be to make the cap on fees after taking account of the levy lower than it is now, which would surely tend to reduce even further the price differences between universities, eating away at ministerial hopes for a market in HE. Worse, it fails to get at what I sense is the nub of the problem is for the government. Though theyve never said this explicitly, ministers seem quite happy to have Oxbridge charge £9,000 a year. But they are unhappy about London Met or Southampton Solent doing the same. These are the kind of places they want to limit fees to £6,000 or £7,000 a year. So BIS needs to find a way of controlling spending that disciminates between different kinds of universities. This is what Willetts was hinting at with his reference to game theory in his last speech. And a Browne-type levy on fees with a maximum already of £9,000 (much lower than he proposed) does not in itself to do that.

But it does create a new pot of money in the gift of the government that it can then allocate as it sees fit. This could be used to shift funding towards elite institutions and away from those further down the league tables. There are many ways to achieve this indirectly. For example, put more money into research (or some of the options below).

In terms of limiting fees, there are several options. First, we had two weeks ago the OFFA gambit, the attempt to use the Office for Fair Access to keep fees down. The new OFFA regime threatens universities with what were presented as tough sanctions if they charged high fees but failed to make progress on improving “access”. But because the targets look easy and the regime toothless, universities seem to have concluded they can all jump to the top of whats allowed.

So one option would be to toughen up the OFFA regime. That would be good for the Lib Dems who are hoping to retrieve some of their reputation with leftish voters by convincing them that the university reforms are socially progressive. But do all those public school Conservatives care about that? And the exchange of letters between OFFA and BIS seems to make clear that it would require a new regulator formed with new legislation. Also, its not obviously going to differentiate between Oxbridge and London Met. And as I argued a couple of months back:

“Its not really a market either, is it? And even though Im a zealot for getting more poor students into university, even I think that balancing the entire system of undergraduate university finance on access questions would be to make the tail wag the dog. If Oxford fails to meet its targets, do we really want to halve the number of students going there?

Just to sketch out what would be required in terms of bureaucracy is to make the anti-quango brigade faint. The biggest chunk of university income would in future depend on assessments made by the Office for Fair Access. Currently OFFA is staffed by Martin Harris (its boss), two men and a dog. But to manage billions of pounds of cash each year, it would have to discuss, approve, supervise, review and mark access agreements from every university. It would operate under tight legal obligations and could require 100 staff. With so much riding on the verdicts, every university, too would have to employ sizeable teams of people to manage the process.”

Perhaps not surprisingly, there is no hint that the government wants to go down this road.

Second, and arguably most logical, would be an attempt to control fees on a faux-market basis, using objective assessment as a proxy for student choice. This could mean looking at the “quality” of undergraduate courses and the “value” they offer students. There is so much data on universities in Britain that cooking up something plausible may be not so tricky.

Quality could be tackled in the same way as it is in school league tables, by looking at the “value added” by the institution. So you could score entrants on their A-level grades and score graduates with data from the National Student Survey and data from later employment. The bigger the average gain in scores, the higher the added value.

Value could be derived from the TRAC (T) accounting data which already estimates the cost of providing different kinds of courses in different institutions.

It wouldnt be pretty and there would surely be anomolies and unfairness, but might it be good enough? On the up side for ministers, it might in future allow a gradual transition to a genuinely student-driven regime, with a real market replacing a faux one.

Finally, there is the option of using data on which loans go bad from the Student Loans Company. This is politically attractive for two reasons. Those universities with the worst repayment records tend to be those where ministers want to keep fees down. And it would shift some of the financial burden of loans from the taxpayer to the universities – a plausible rationale in itself and yet another HE win for free marketeers. On the downside, Christopher Cook of the FT doubts the SLCs ability to supply the relevant data. And it could give universities a massive financial disincentive to recruit poor students, which would give the Lib Dems another headache.

So there are options. But time is running out and its really not clear that any of them will be effective. The government has withdrawn 80 per cent of the grant it used to give universities for teaching. In doing so, it has thrown away a big stick and left itself with a straw. Now it wants to herd the universities into line. But they are in a much stronger position to simply ignore the Whitehall shepherd.

Willetts surely is serious in wanting the market to do the job eventually, but his decisions show he is not willing to trust the market in the short term and even in the long term there is nothing to suggest he knows how to create the kind of market he wants. Confronted with reality, the ideology is crumbling (even if the rhetoric has yet to catch up). In the meantime, he needs a short term fix. None look easy.

“Maybe,” as one academic wrote to me, “he will just take the extra money off the remaining HEFCE T and R budgets, but I think this is less likely – there just isnt enough in the T budget, and given theyve made so much of the science ring-fence as part of the (vanishingly small) coalition growth strategy that I cant see taking it from research being very attractive politically.”