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HE funding in the UK - new fees model

2010, November 3 - 22:24 — PatParslow

I really hope I am missing something here - please let me know if you spot it.

The UK Government today announced its new HE funding model. The graduate contribution goes up from fees at £3,290 to somewhere between £6,000 and £9,000 per year. The student doesn't have to pay these up front, with the Government offering a loan system that allows them to start re-paying once they have graduated and are earning over £21,000 per annum, at a rate of interest based on the RPI and up to 3% on top. The Government is withdrawing approximately £4,000 per student per annum from its current funding mechanism, and already loans students the £3,290 on similar (but somewhat better) terms.

Universities currently have to show that they are helping students from less advantaged economic backgrounds by offering bursaries. The University of Reading, for example, pays out about £3,000,000 in bursaries and support to help widen access. It has an undergraduate population in the region of 12,000 - so approximately 7.5% of the top-up fees it is allowed to charge go into paying bursaries for the less well off. That is, the top-up fees at the moment provide the University with about £36,000,000 [figures have been corrected since original posting]. It should be noted that this calculation appears to be wildly at odds with information from the University (http://www.reading.ac.uk/about/newsandevents/releases/PR20347.aspx) which indicates that at £2.4million it was spending 26% of its fees income on bursaries. That implies a fees income of £9.2million from 12,000 students, which equates to only £769 each, so I am a little confused by their figures. [This is probably due to those figures covering a period when the top-up fees had just been raised substantially, and there were still students in the system paying the lower rates].

I am not sure whether the details of how much support will need to be given by Universities has been mentioned yet (or even worked out) - but one chilling point is that the £6,000 'threshold' apparently does not carry a requirement to support wider access, whereas the £9,000 'cap' would do so (e.g. http://www.bbc.co.uk/news/education-11677862).

So let us assume, for the moment, that there is no marketing advantage to choosing to charge £6,000 and that all universities pick this as their fee level (for the sake of argument, in fact it would seem highly likely that the reverse may be true). The Browne review (http://hereview.independent.gov.uk/hereview/) said that universities would have to charge £7,000 to balance the books given the 'comprehensive spending review', but if we stick to £6,000 we can still start to see what impacts this might have on a graduate.

At £6,000 each year for 3 years, the student will end up with £18,000 debt just for the fees. Never mind about living expenses, we will assume students don't eat, or go out, or wear clothes, or have to rent accommodation, or any of that tedious mundane nonsense. The current RPI is 4.6%, so let's work with that. Actually, let's be ridiculously generous and assume that it is only 4%. So interest on the loan will be about 7%, or £1260 a year - once the student earns £21,000, otherwise apparently (according to Willetts' answers in the House of Commons today) the interest rate will be 0.

The graduate will pay back at a rate of 9% on earnings over £21,000 per annum. So, in order to be able to pay off just the interest on their loan, they will have to earn £35,000. And remember, I've been pretty conservative in all the estimates made so far. Well, with the possible exception of the rate of inflation, which may collapse through the floor as the economy heads into a tail spin driven by cuts and a decreasing number of people educated to HE standards over the next decade, but then they won't have jobs so won't have to pay anything back. Check out the job advertisements, and the numbers of unemployed graduates and consider that £35,000 figure.

Essentially, a large number of graduates will probably never pay off their loans, especially not before the write-off period of 30 years. With a basic rate of tax at 20% those graduates will be paying nearly 50% more tax (on the portion over £21,000) than people who do, say, an apprenticeship and get an equivalently paid job. Given the tax details for the next year, this means a student who earns enough to keep the interest at bay (£35,000) will actually pay very nearly 30% more in tax (and let's make no bones about it, this is a tax) than those on £35,000 who did not go to university. That degree sound particularly tempting now? Cameron said he wanted to make the UK entrepreneurial, and I think we might have seen how - given the penalties for going to HE, and the lack of jobs for graduates (bear in mind the public sector, which is being massively cut back, has typically employed half of graduates in the UK), it would make a lot more sense for a lot of potential students to enter the job market from school, and only consider a degree later in life.

So few students will actually pay their loan off. The Government will be investing the money up front to cover the increased fees - money that will (often) not be repaid. I don't know whether the Student Loans Company (SLC) will be keeping the interest payments; let us assume they won't and that the money goes back to the Government (unlikely to be entirely true, but again, let's be generous). Instead of getting the actual loan back, the Government is imposing a 30% tax rise on graduates - presumably looking to secure a funding stream. They will earn £37,800 in interest payments per student, but, of course, that figure includes inflation. Adjusting for inflation, it works out at about £22,000 - over a 30 year term, they will get back about £4,000 more than the investment (all things being equal) - if the average graduate manages to earn £35,000 (which might just about be possible on average).

If the SLC gets to keep a cut, any apparent saving disappears rapidly. So tomorrow's students will be indebted for 30 years, with little real chance of paying the debt off (and who wouldn't arrange with an employer to delay a pay rise for a while if it meant that you went over that 30 year write-off period first?), and the Government will see precious little, if any, benefit from it. On top of that, this is using the 'cheap' model where the universities cannot afford to subsidise the poorer students, so only the richer ones will go to university anyway. This is, perhaps, where the Government will make a real saving in the short term, as it will have to front-up less cash if fewer students go to university. In the medium to long term, of course, this means there will be fewer graduates to invest money in universities, and fewer to provide the skills necessary for the economy, but again, let's gloss over such tedious minutiae as the long term health of the economy.

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Comments

2010, November 5 - 15:19 — gordy (not verified)

A few notes, which you either

A few notes, which you either missed or failed to mention:

1) Most of what you said is recognised in the Browne review. Quoting directly from the official summary:

http://www.bis.gov.uk/assets/biscore/corporate/docs/s/10-1208es-securing...

"We estimate that only the top 40% of earners on average will pay back all the charges paid on their
behalf by the Government upfront; and the 20% of lowest earners will pay less than today. For all
students, studying for a degree will be a risk free activity. The return to graduates for studying will
be on average around 400%."

That seems to be roughly consistent with your numbers. The Browne review is saying that 60% of graduates will indeed never pay their loans off. That is why the government would prefer people to see this as a tax and not as a debt; the word 'debt' implies you have to pay it off, with interest, and if you don't baliffs will be coming round to your house. Neither is now the case.

2) The government isn't intending to 'benefit', in the sense of make money, from the student finance arrangements. The repayment system suggested roughly covers the amount the govt. has to shell out up front, and little more, according to your own calculations. Remember, at the moment there is huge taxpayer subsidy of the system, in the sense that students pay £3000 of fees (eventually) and the govt. makes up the rest. If students now pay £6000 of fees, and the repayment structure covers that extra, and then the govt. covers the rest, the government makes a saving to the tune of £3000 per year per student. There are currently around 2 million students. Even accounting for the fact that some aren't eligible for finance, that is going to be a big number, and the £3.5bn mooted for cuts to univerisity funding sounds like a pretty reasonable estimate. See point (4) below for an illustration of how it can be the case that many students never pay off their loans, but the average each student pays can still be £6000 per year. In effect, the richest grads will pay quite a bit more than that, since there is now a real rate of interest, subsidising those who fail to pay it back.

So I'm not sure what you mean by this:

"So tomorrow's students will be indebted for 30 years, with little real chance of paying the debt off (and who wouldn't arrange with an employer to delay a pay rise for a while if it meant that you went over that 30 year write-off period first?), and the Government will see precious little, if any, benefit from it."

3) That said, a huge factor that you have missed, when talking about how attractive (or not) getting a degree is, is that the loans for maintenance and loans for tution fees are rolled in (and repaid) together.

So let's take a student who incurs £18000 of debt from fees, and £11000 from the maintenance loan, and goes on to have an average salary of £35000 over the 30 years, as you have suggested. He/she will pay back £37800 overall, £22000 in today's money (your calculation, not mine), of which £11000 is covering living expenses. I think it is reasonable to deduct the cost of living expenses, because you have to pay living expenses whether you go to university or not, and because these expenses have not changed with the review, so the actual degree is costing £11000 in today's money.

Right now, fees are £3290, so the cost is £9870, and applications to university have never been higher. Do you really think making it cost £1130 more, in real terms, is going to make it that much less attractive?

4) Of course, some graduates will pay an awful lot more. If you go into the civil service, or banking, or law, you could expect to earn an average of £49000 over the period, especially after accounting for inflation/pay rises. An average of £49000 would mean paying back exactly twice as much as the graduate on £35000, i.e. £44000 in today's money. That is higher than the £29000 you were loaned, but since there is a real interest rate being applied to these graduates (of 3%), I think it is reasonable to assume these grads would pay back at least £35000. Again deducting the maintenance loan, that means the degree cost £24000, or £8000 per year.

So, is £8000 per year, or £24000, a reasonable cost for a degree? Well, for most graduates, probably not. But if you want to go into the banking, the civil service, or law, the most direct and easiest route is to get a degree, and once in those professions, you probably earn far far more than you would had you not gone to university. The 'graduate premium' for these high-earning graduates in the professions is (I would guess) much more than £24000, because without a degree they would have been all but locked out of their preferred career. So its still worth their while to go as well.

*****************************

That is not to say these proposals are perfect. No system is, especially no system this size. But I think the funding model laid out is roughly on the right lines. It is substantially more progressive that the old system, and the numbers seem to add up. I couldn't really expect any more than that in these constrained times.

2010, December 12 - 17:28 — uanime5 (not verified)

"So let's take a student who

"So let's take a student who incurs £18000 of debt from fees, and £11000 from the maintenance loan, and goes on to have an average salary of £35000 over the 30 years, as you have suggested. He/she will pay back £37800 overall, £22000 in today's money (your calculation, not mine), of which £11000 is covering living expenses. I think it is reasonable to deduct the cost of living expenses, because you have to pay living expenses whether you go to university or not, and because these expenses have not changed with the review, so the actual degree is costing £11000 in today's money. "

Deducting the cost of living expenses isn't reasonable because someone not at university could live at home, where they wouldn't have to pay living expenses. They could also avoid these expense by claiming housing benefit or by getting a job and earning money to pay for their expenses. So if you're going to deduct living expenses you also should make an allowance for the money the student could have obtained by not going to university by claiming Job Seekers Allowance (£51.85 per week or £2,696 per year) or by working at a minimum wage job (£4.83 an hour, £181 a week, or £9,412 a year for 18 to 21 year olds).

Factoring in the amount of money the student could have made by working rather than going to university also helps calculate how much their degree is worth.

2010, November 5 - 16:37 — PatParslow

Thanks for the response

 Hi Gordy,

  Thank you for taking the time to respond.  I'll take your points as you numbered them.

1) The Borwne report uses the existing 'graduate premium' calculations (as far as I can see), which do not compare like for like, and include the high earning professions (lawyers and doctors) in the average (which to some extent is fair, being an average, but skews the results as there are not many of them) to guesstimate a 400% return on investment.  At the moment, the actual graduate premium for many arts students is next to nothing or negative.  This, obviously, gets worse with the new arrangements.

The Government was very clear it did not agree with having a graduate tax, and I have heard nothing to suggest they want people to think of it as a tax.  Indeed, they are very specifically continuing to offer the finance as a loan, apply interest and treat it in every way as a debt.

2) Willetts talked about saving money by introducing the new arrangements, so I cannot quite believe that they are not intending to benefit.  At least, they want people to believe that the Government will save money, otherwise he wouldn't have said it in his answers in the House of Commons.

The point about the 'huge' subsidy is precisely that this scheme means there will still be the same level of subsidy, if universities choose the £6000 'threshold' fee level (which they won't be able to afford).  The actual cost to the Government will increase if they charge more because of the need to provide the funds up front, and the likelihood of people not repaying.  It is a sub-prime lending regime.  At best, if people manage to earn the (above average) £35,000 so that they can repay the fee part of the loan, the Government is going to recoup the money only through the interest payments (though I grant it doesn't matter much whether it is the interest or the capital, per se) over a 30 year period, and that still assumes that there is no cost attached to running the system.

3) The maintenance loan is, I believe, going to be roughly halved, but let's not quibble (the grant is apparently increasing slightly too).  Let's also not worry about the need for students to earn extra money to be able to cover the basics, including housing, food, bills, course materials etc.  

4) There will be precious few jobs in the civil service (or any other public service) for some time.  Banking is an option for a 'generic' graduate (law isn't, really, and is one of those exceptions which shouldn't really be lumped in with the other calculations), but there aren't that many highly paid jobs available for all the graduates to get into.  

As I said, my calculations were on the conservative side - if you include the £11,000 maintenance loan, you need to be earning £45,500 to just cover the interest payments over the 30 years (again, check my maths), so the rest of your argument in 4) appears to fall down.  Also, in real terms, the cost is a lot more than £1130 a year more - you appear to have compared a value discounted against inflation against an up-front cost (which is currently paid back over time on much more reasonable rates, and is thus, in real terms, much smaller - about £4362 if paid off over 20 years with the current RPI).  Similarly, for just the fees at the 9k level, you need a salary of around £45,000 to repay the interest only.

So my conclusion still has to be that this is a disincentive to an informed prospective student (if they care about debt, their earnings, or the ability to get a mortgage and enter the property market), and provides worse value for money to the Government.  I am still not at all convinced it will even provide more money for the universities.

 

 

 

 

2010, November 5 - 09:05 — Peter P (not verified)

earlier comment

whatever happened to it? Any sign of a comment from me a couple of days ago?

2010, November 5 - 12:03 — PatParslow

Erm... nope

Afraid not! No sign whatsoever.  The server did have trouble connecting to its database briefly (but you wouldn't have seen the post in the first place if that had been the problem!)