London Economics analysis of UK higher education funding reveals disparate picture
“There is a widespread lack of understanding of higher education funding systems. As a result, many election pledges or post-election system amendments have been poorly thought through and there have been significant unintended and adverse impacts on different groups of students and graduates.” So says an analysis of student finance from policy consultancy London Economics, published today.
It is hard to disagree. So it is helpful to have this comprehensive breakdown—supported by the Nuffield Foundation and the Higher Education Policy Institute—of the funding systems in the four nations of the UK.
Higher education is a devolved matter—currently with four different political masters—and correspondingly things vary significantly between UK universities. The unit of resource available to institutions, the cost to the exchequer, graduate debt, loan repayments and the balance of contribution between students and government all differ from nation to nation.
Scotland most expensive
The London Economics analysis lays out some figures about the cost of higher education. In England, the total cost to the Treasury is just £1,630 per full-time home student; in Scotland, it is £9,130; in Wales, it is £3,780; and in Northern Ireland, the figure is £4,810. Those numbers take into account the value of maintenance grants and loans, tuition fee grants and loans, institutional teaching grants and predicted loan repayment rates.
That makes Scotland the most expensive higher education system in the UK per student, and England the cheapest. But universities both north and south of the border are facing sustainability problems at the moment.
The variation in cost to the exchequer is not necessarily reflected in the amount of money available to universities. In England, institutional income (including teaching grants) per full-time home student is £10,220. In Scotland, it is £7,870; in Wales, it is £9,290; and it is £7,620 in Northern Ireland.
So Scotland has the highest cost per student and the second-lowest institutional income. The cost per student is relatively high in Northern Ireland, but universities there have the lowest income per undergraduate.
Of course, it depends on what you value most—and that is a political question.
“The rocks will melt with the sun before I allow tuition fees to be imposed on Scotland’s students,” read the stone installed at Heriot-Watt University by Alex Salmond, former first minister of Scotland. The Scottish higher education funding system has endured longer than either the political career of Salmond or the stone itself, which has since been retired by the university.
A Labour win in a general election at Westminster would do nothing to change the student finance system in Scotland. That is a matter reserved for Edinburgh. It would be a brave party that campaigned for Holyrood elections on the basis of introducing tuition fees into Scottish universities.
Cost to government
Based on an analysis of this year’s student cohort, London Economics says the Resource Accounting and Budgeting charge—the estimated cost to government of borrowing to support the student finance system—for England is now 4 per cent. It is 21 per cent in Scotland, 10 per cent in Northern Ireland and -3 per cent in Wales, which suggests the Treasury is making money out of Welsh higher education.
The contribution split between the exchequer and graduates swings wildly across the four nations. In England, graduates are paying for 84 per cent of their education, with the Treasury paying for 16 per cent. In Wales, that ratio is 56:44; in Northern Ireland, it is 49:51; and in Scotland, the Treasury is paying 113 per cent of the cost (meaning students are effectively being paid to attend university, if you remove the cost of other living essentials).
So England has the cheapest system and delivers the most resource to institutions, but this is because the vast majority of the cost of higher education has been transferred to students. You might argue that this is a choice worth making. But it is certainly a choice.
The cost per student and income per university, across the four nations, are the result of political choices made by voters in each of the jurisdictions, according to each electorate’s priorities. Delivering the most cash to universities or costing the exchequer the least does not necessarily translate to the best or fairest political choice.
Alternatives for England
Gavan Conlon and crew at London Economics present each of the four nations with options on what would happen should certain levers be pulled.
In England, cutting tuition fees by a third and replacing the money with teaching grants for institutions would cost the Treasury just over £3 billion per cohort. Increasing maintenance loans and extending eligibility for those loans would cost an additional £500 million.
Lowering the headline rate of tuition fees does not benefit low-earning graduates, who would have the same repayment terms regardless of their total debt. In contrast, reintroducing real interest rates of 1 per cent would reduce the cost to the government by roughly £2bn, “thus making the system cost-neutral for the exchequer”, says the London Economics analysis—graduates would make an extra £2bn worth of repayments, with those on lower incomes least affected.
In scenario one for England (lower fees and higher teaching grants), combined university income would be better off by £104m per cohort, while the Treasury would be £3bn worse off. As a trade-off, that is not much of a deal for the taxpayer, while £104m will not go very far when divided across the sector.
In scenario three (real interest rates), the cost to the taxpayer is balanced out between Treasury and graduate contributions—but the change would have zero effect on the amount of money coming into universities.
In Scotland, the first alternative scenario is the introduction of a £9,250 tuition fee model. This would reduce the cost to the Treasury by £554m, put an extra £416m into university coffers and cost graduates an extra £970m, “borne by middle- and high-income graduates, while graduates at the bottom of the earnings distribution would be unaffected”, according to the analysis.
Looks like a win for everyone except graduates. It all comes down to where your priorities lie.
The second scenario for Scotland involves an increase in maintenance support for students, which is necessary, if expensive, adding a cost of £38m to the loan book.
The third scenario for Scotland is using real interest rates, which reduces the cost to the Treasury per cohort by £54m, which is of course borne by graduates who previously paid nothing for their tuition.
Options for Wales
In Wales, the first scenario offered by London Economics is higher tuition fees, while lowering the value of teaching grants. This would marginally decrease the cost to the Treasury (by £13m), increase income to institutions (£22m) and pass the cost on to graduates (£35m).
Welsh scenario two imagines a faster uprating of repayment thresholds for student loans, which would cost the Treasury (£115m) and save graduates (by the same amount), while not providing universities with any additional resource. Reducing real interest rates in Wales has the effect of costing the exchequer more (£142m) while saving graduates a similar amount.
But London Economics warns that “the repayment system would become more regressive, as high-earning graduates would benefit from lower repayments, while low- and middle-income graduates would be unaffected”. The move would also add nothing to university income.
Future for Northern Ireland
In Northern Ireland, the first scenario offered (increasing fees and lowering teaching grants) gives universities an extra £59m (not to be sniffed at in the regional context), while decreasing the cost to the Treasury by £37m and costing graduates an additional £96m. Scenario two (higher maintenance loans) costs the exchequer £44m more but saves graduates the same amount, with lowest-earning graduates benefiting the most.
Introducing real interest rates in Northern Ireland transfers £23m of costs from the Treasury to graduates, with the highest earners paying most. Over the lifetime of loans for a cohort, that is noise in the system.
It is all interesting stuff from London Economics but, as ever, it comes with caveats. There is always a difference between theory and practice.
As Conlon notes in a statement: “The challenge is that the economics doesn’t always align with the politics. Universities are generally underfunded, but increasing the tuition fee is electorally challenging. Raising maintenance support is critical, but expensive.”
“Electorally challenging” is precisely the sort of phrase a consultant might use when explaining to legislators that whatever they do will be unpopular. It is all very well politicians understanding their national funding system better thanks to the London Economics analysis, but that does not make it any easier to create manifesto commitments that will fly with the electorate while ticking all of the boxes for the Treasury, universities and students.
In fact, the modelling shows that this may be impossible. The only thing that will fend off sustainability problems in universities is an injection of cash either through increased fees or a raise in teaching grants.
Is that on the agenda for any political party’s manifesto this year?
This article is an extract from the Research Professional News 8am Playbook email, published this morning. To enquire about subscribing to Playbook, please fill in this form and include ‘8am Playbook’ as the subject.