Conservatives' plans for Higher Education funding: who gains and who loses?

The Conservative party today announced new plans for funding Higher Education (HE). The plan is to abolish all university tuition fees, and to make up for the lost fee income by removing subsidies on student loans, instead allowing banks to charge graduates a market rate of interest.[1]

The Conservatives make clear who the gainers would be from their proposals, but are less clear who pays for those gains. But there is no free money or magic bullet: any gains for some have to be paid for by losses for others.

The exact gainers and losers cannot be known with certainty, but they are likely to be as follows:

Universities

The university sector will gain overall. This is because the Conservatives not only pledge to replace all lost fee income, but also to endow universities with additional new money. The new money amounts to the equivalent of an increase in public spending on HE of ó80 million per year.[2]

• But only universities that can raise matching funds will benefit from this new money. It is not yet clear which universities will prove successful in this, but it is likely to be those with generous alumnae, or with other outside sources of revenue.
• The Conservatives also plan to change the way that they allocate existing funds to universities, by moving to a "National Scholarships" scheme. It is not yet clear which universities will gain or lose from this, but the change may have important distributional consequences.

Taxpayers

The policy is designed to be revenue neutral to the taxpayer. This means that the new money for universities must come from either graduates or students, or some combination of both.

Students

Whether students will gain or lose will depend on both their family background and the choices they make about how much to borrow.

• Students from the poorest backgrounds[3] are likely to face the choice of either lower income at university or higher loan repayments later in life, compared to under Labour. This is because although they will retain the ñ,500 grant promised to them by the Labour government, they will lose the additional ñ,200 per year additional grant promised under Labour's Single Combined Higher Education Grant[4], as well as up to ó00 per year in bursaries from the university.
• Students from better off backgrounds will be able to borrow more in maintenance loans than under the Labour system.

Graduates

Whether graduates will gain or lose will depend on their lifetime earnings, the amount that they chose to borrow as students and the interest rate charged by banks.

• Almost all graduates will gain from the removal of fees[5].
• But graduates will lose from the higher interest charged on maintenance loans, and the greater risk associated with this.
• Graduates from the lowest income backgrounds may face higher loan repayments than they would under Labour even though they no longer have to pay fees. For example, a student entitled to full grants and bursaries under Labour would receive a state-sponsored income of around ö,500 each year.[6] The total value of loan repayments, including loans for full top-up fees for this student under Labour could be 25% lower than the loan repayments of the same student under the Conservatives' system, if they borrowed up to the maximum to ensure the same ö,500 income.[7]
• Graduates who have relatively low earnings over their lifetimes will also tend to pay more under the Conservatives' system, although for the very lowest earners any outstanding balances will be written off after 25 years under both systems. This contrasts with the Labour system where those who earn less over their lifetimes will always repay less than higher earners.
• Even those not on low lifetime earnings will typically see the value of their debt go up over time at the start of their careers. For example, graduates with an outstanding debt of ñ6,250[8] will have to earn more than ò1,500 in order to avoid their outstanding debt levels increasing over time rather than reducing.[9] If interest rates hit 8 per cent the relevant earnings point will increase to ò4,500. Those taking career breaks will also see the value of the outstanding value of their debt go up rather than down.

A detailed briefing note on the proposals, with examples of possible gainers or losers will be published shortly.

Ends

Notes to editors

1. See Conservative Research Department (2004), Funding the Future, A Conservative Policy for Universities and Student, London.
2. This increase compares to total government funding to universities (via HEFCE) of õ.993bn in 2004-05.
3. The grant is ñ,500 if family income is below ñ5,970 and is tapered to zero at a family income of ò2,260.
4. See Department for Education and Skills (2004), Moving toward a Single Combined Grant for Higher Education, London.
5. Under the Labour system some universities may choose not to charge fees for some courses, in which case there would be no gain.
6. This would be made up of ò,700 in grants, ó00 in bursaries and ó,555 in maintenance loans for a student living away from home outside of London not in their final year.
7. This example assumes an average male graduate earnings profile. The student under the Labour system borrows in total ñ9,335 over a 3 year course. The net present value of his repayments is ñ3,680, assuming a 2.5 per cent discount rate. Under the Conservative system his total borrowing is ñ5,000 over the 3 year course. The net present value of the repayments assuming a 6.5 per cent interest rate is ñ7,140.
8. This will be the graduating debt in 2006/07 prices of a student who borrows the maximum õ,000 per year over three years at an interest rate of 6.5 per cent.
9. Our estimates of the median graduate salaries at age 21, based on the Labour Force Survey, are ñ5,100 for males and ñ4,100 for females.