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Home Publications A birthday present that could solve the university tuition fees dilemma

A birthday present that could solve the university tuition fees dilemma

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I really shouldn’t be doing this, spilling yet more words on the vexed subject of university tuition fees. The relatively privileged minority who make it to university still, on average, follow an easier path, get a better-funded education and end up earning more than their peers who go to further education colleges, do apprenticeships or miss out on post-compulsory education altogether. Not only do university students get all that, they get the political and policymaking attention, too.

People like me need to stop banging on about tuition fees and start focusing on things that have a chance of really changing outcomes for young people, and the future of the economy, things like the provision of further and vocational education.

But here goes, anyway. There is so much confused thinking, misunderstanding and plain untruth knocking around on this subject that I can’t stop myself.

First, let’s get over the untruth. It is not the case that the introduction of £9,000 tuition fees has resulted in a reduction in numbers of disadvantaged students applying to university. The gap between those from higher and lower-income backgrounds remains too big, but it is lower than it was in 2012, when the higher fees were introduced.

Given the size of the fees and the well-known antipathy towards debt of those from lower-income backgrounds, that looks pretty remarkable. But perhaps not so remarkable when you consider the nature of the “debt” that graduates take on. It is not debt in the normal sense of the word. The present system actually looks quite a lot like a graduate tax. We could do a lot more to explain this to students. Repayment is at a fixed rate, 9 per cent, on earnings over a floor at the moment of £21,000. A high interest rate is charged, more than 6 per cent for some currently. And debt is forgiven after 30 years, with an expectation that the majority will not repay fully.

This creates a highly redistributive system in which higher earners pay back a lot more than they “borrow” and low earners a lot less. Sadly, graduates from lower-income backgrounds tend to go on to earn quite a bit less than their better-heeled peers. Tuition fees hit the middle classes harder not only because they are more likely to go to university but because they earn more having been there.

Designing the system like this also means that prospective students are highly unlikely to be price-sensitive. They don’t pay up front. Most will never pay in full. Those who go in with the lowest grades and go to the least prestigious institutions are least likely to pay in full. It is hardly surprising, then, that universities charge the maximum fee for virtually every course. Why wouldn’t they? In a lot of courses at a lot of institutions, very few students will end up paying back a penny more if they are charged £9,000 a year as opposed to, say, £6,000 a year. The extra £3,000 is just free money from the government. Andrew Adonis, one of the architects of Labour’s original variable tuition fee policy, has accused universities of forming a cartel by all charging the maximum fee. They haven’t formed a cartel. They have simply responded rationally to the funding system they are working with.

There’s actually quite a lot to like about all this. Something that supports university education, saves the government an awful lot of money, does not get in the way of social mobility and redistributes from the highest earners has a lot going for it. But it suffers from at least two big problems.

The first is this lack of price-sensitivity. Some courses are overpriced. Many graduates from a disturbing number of universities actually earn less than the average non-graduate. The students themselves are insulated from the costs involved because of the nature of the income contingent loan system. Taxpayers are not.

Of course, if we don’t want to put off students from poorer backgrounds, we need a loan system that ensures they are not price-sensitive and that they are protected from bad luck in the labour market. We’ve achieved that bit, in which case surely we need more serious and heavy-handed regulation to ensure we get value for money. Because this is not an effective market. Sorry all my friends in the university sector, I know you’ll hate me for saying it, but there it is. This is not a proper market and it needs regulating.

The second big criticism seems to be about the unfairness to younger people. Something like 40 per cent of them go to university and will face much higher effective tax rates than older generations. That simply looks unfair, yet another way of punishing a younger generation that is, in any case, doing badly in the labour market, in the housing market and with respect to pension provision. Many young people have every reason to feel hard done by.

One response would be to cut or abolish tuition fees. That would help graduates, treating this generation more like previous ones and avoiding the concerns about high levels of indebtedness, although cutting fees or reducing interest rates would really help only the highest-earning graduates.

There is a case for this, but if it’s really a generational thing we are worried about, here’s an alternative. For not much more than half the cost of abolishing tuition fees, we could make a gift of £10,000 to each and every young person when they reach their 21st birthday. That would help all young people, not just graduates. It could be transformational for many. And, for once, it would be a clear and transparent redistribution from old to young rather than the other way around.


Paul Johnson is the director of the Institute for Fiscal Studies, follow him on twitter @PJTheEconomist.

This article was first published by The Times and is reproduced here in full with permission.