Select Committee on Education and Skills Appendices to the Minutes of Evidence


Further memorandum from Universities UK (SS 22)


  1.  This paper was originally commissioned by Universities UK as part of the preparations for the 2002 Spending Review, and was based on the assumption that the current student support arrangements could no longer be sustained. Subsequently the Government established a Review of Student Support which is being undertaken in Whitehall under the Chairmanship of the Secretary of State for Education and Skills. The paper considers the wider issues raised by briefings in respect of the Government's Review and some of the ideas for change that have been floated. This includes, in particular, the possible implications for institutions of abandoning the means-tested contribution from individuals and their families to tuition fees for full-time undergraduate study.

  2.  The paper is predominantly concerned with the financial support arrangements for full-time undergraduate students. That appears to be the focus of the Government's own review and reflects particular concerns about continued low participation in higher education (HE) from those from the lowest socio-economic groups. This does not mean that there are no concerns about the financial support for other types of student such as part-time undergraduates and postgraduates. However, in the first instance, the Government is now looking for the growth in participation, it is seeking by the end of the decade to come from growth in full-time undergraduate study and in particular from increased participation from individuals from the lowest socio-economic groups.

  3.  Universities UK's stated objectives for student funding are:

    —  to ensure that student financial arrangements do not represent a barrier to higher education;

    —  to ensure that public funding for additional student numbers is focused on the recruitment and retention of non-traditional students, who are necessary to achieve the Government's HE participation target;

    —  that improvements in student support should not be at the cost of institutional funding; and

    —  that the principle of up-front tuition fees should be maintained.

  4.  This paper reflects the discussion of an earlier draft at the meeting of the Board of Universities UK on 26 October 2001. In particular this paper develops options, consistent with Universities UK's current policy that individuals who benefit from higher education should be expected to make some contribution to the costs, based on the following principles:

    —  the maintenance of the current system of means-tested contribution to fees for full-time undergraduates;

    —  substantially increased grant support for maintenance in place of loans for students from the poorest families;

    —  simplification of the administration of student support compared with the current system of loans, some very limited mandatory grants and a plethora of discretionary grants to meet student hardship;

    —  some increased contribution from those from the most well off families.

  5.  The main options considered are adjustments to the current system, although they would guarantee some grant support to students from the poorest families. However, the paper also considers a more radical option in-line with some of the Press briefing that has emerged from the Government's review.


  6.  The main elements of the context for the current consideration of the system of financial support for full-time undergraduate students are:

    —  the Government's target for 2010 that 50 per cent of those aged 30 should have participated in higher education. This includes full-time, part-time, sub-degree and first degree and is irrespective of whether higher education is delivered in FE colleges or HE institutions;

    —  general concern about a levelling-off in demand for full-time undergraduate HE (at least until this year);

    —  particular concern about the continuing low level of participation of qualified young people from the lowest socio-economic groups in HE within the social inclusion agenda. This is primarily about full-time undergraduate study;

    —  the changes to the financial support arrangements for Scottish undergraduate HE students following the recommendations of the Cubie Report and in particular the replacement of the means-tested contribution to fees at the time of study with a smaller contribution from graduates linked to income-contingent loans. More recently similar changes were proposed and have been accepted by the Welsh Assembly in terms of the financial support arrangements for Welsh HE students recommended in the Rees report; and

    —  concern about the lack of rationale for the less generous financial support arrangements for adults in further education and work-based training.

  7.  In the light of strong opposition to the Government's student support policies in England, voiced during the Election campaign, the Government is undertaking its own review as indicated by the Prime Minister in his Speech to the Labour Party Conference last autumn. It appears that the review has been underway since early summer and that it is considering some fairly radical options for change in the system of student support. The additional costs of any changes proposed by the review would fail to be considered within the context of SR 2002. In addition the Department for Education and Skills is undertaking a wider review of higher education across a range of issues.


  8.  For full-time undergraduates in England, Wales and Northern Ireland there are in the current year two main forms of student financial support from public funds:

    —  the means-tested public contribution to tuition fees up to a maximum of £1,075 for those with residual annual family incomes of £20,000 or less falling to zero for those with annual family incomes of more than £27,000;

    —  student loans for maintenance with an average maximum value of £4,000 per year of study. Every full-time undergraduate is entitled to three-quarters of the average maximum value with the remaining quarter means-tested against family income for those with annual family incomes above £27,000. Loans are repayable on an income-contingent basis with a repayment threshold of £10,000 and a repayment rate of 9 per cent of marginal income over £10,000. The loans attract zero real interest ie interest is charged at the rate of inflation from the point at which the loan is taken out. For the purposes of accounting for public expenditure under resource accounting it is only the interest rate subsidy and the estimate of the proportion of the face value of the loans that will never be repaid that is taken into account. The current estimate is that the average public subsidy is about 35 per cent of the face value of the loan. It is this figure that we have used throughout in estimating the costs of the options considered;

    —  a very limited range of grants for students meeting particular criteria. These include in particular grants for parents with dependent children, grants for students with disabilities and from this year opportunity bursaries that are aimed at students from low income families with little or no family experience of higher education. Opportunity bursaries will be paid by institutions, but are modest amounting to £2,000 over a three-year course; and

    —  a wide range of discretionary funds predominantly administered by institutions to alleviate student hardship. The total amount of these discretionary funds in 2001-02 is about £100 million

  9.  The governments of Wales and Northern Ireland are seeking to increase the amount of as of right grant funding for the students from the poorest families. In its report to the Welsh Assembly the Rees Committee also recommended that the Assembly should seek to persuade the DfES to abandon the requirement for means-tested contributions to tuition fees in Wales following the lead already taken by the Scottish Assembly in response to the recommendations in the Cubie Report.

  10.  Figure 1 below shows how the main public subsidies for full-time undergraduate student support vary with family income.

Figure 1: Variation in Public Subsidy for Full-time Undergraduates with Family Income

  11.  The public subsidy element of the student loan has been calculated using the 35 per cent estimate of the resource cost of these loans. While this figure shows that under the current arrangements full-time undergraduate students from low income families receive more than twice the public subsidy as those from higher income families, there is no increase in subsidy as family incomes fall below the minimum of the means-test nor any reduction in subsidy for those with family incomes above the maximum of the means-test.

  12.  Part-time undergraduate students are eligible for publicly funded fee remission if they are in receipt of benefit or working families tax credit. They are also eligible on a means-tested basis up to a maximum income of £13,000 if single and £15,000 if married for a student loan of £500 per annum for up to six years to assist with the costs of study on the same repayment terms as loans for full-time undergraduate students.


  13.  There are two kinds of concern about the current financial support arrangements for full-time HE students:

    —  the ending of mandatory grants and their replacement with loans has increased the reluctance of those from the lower socio-economic groups to enter higher education because of debt aversion. The various discretionary schemes introduced to alleviate financial hardship have hindered rather than helped by adding to uncertainty and lack of understanding.

    —  the introduction of the means-tested contribution to fees is a further inhibition to participation amongst those students from the poorest families, even though under the operation of the means test they or their families are unlikely to have to make a contribution.

  14.  Research evidence to support these concerns remains limited. It is only the fourth year of the new system of financial support. Most of the available evidence is based on the first two years of operation and is based often on focus groups of limited size. There has been insufficient time for any significant longitudinal study of attitudes of young people thinking about entry to HE and their subsequent decisions and experience.

  15.  The main source of evidence of the impact of the new system on the finances of different types of student is provided by Claire Callender's Student Income and Expenditure Survey for DfEE.[1] This was based on a structured sample of HE students and undertaken in 1998-99, the first year of operation of the new system.

  16.  As part of HEFCE's current wider study of supply and demand,[2] a review of the literature on the impact of the new system both on the intentions of those from the lowest socio-economic groups contemplating entry to higher education and on the experience of students in higher education of financial hardship and attitudes to loans was undertaken by Nigel Brown Associates. They also sought to identify any evidence that distinguished between the impact of the introduction of means-tested tuition fees and the ending of mandatory maintenance support.

  17.  While bearing in mind the caveats about the limited extent of the research evidence, it does paint a fairly consistent picture of the attitudes of young people from the lowest socio-economic groups to entry into higher education. Financial concerns are only part of a range of negative attitudes towards participation in higher education, but the particular financial concerns are:

    —  ignorance of the likely costs of higher education and the range of financial support available. This shows up most consistently in a lack of understanding of the impact of means testing of free contributions on the likelihood that they will not be required to make any contribution;

    —  aversion to debt and fear that they will not be able to pay back loans based in part on a lack of understanding of income-contingency;

    —  a strong view that the principal benefit of higher education is the access it provides to better paid jobs. This is matched by a concern that they will fail to secure the benefit because their choice of institution and course is restricted by the need to study locally and that their performance will suffer because of the need to work during term time to minimise debt; and

    —  messages from their peer group about experienced hardship.

  18.  The current research being undertaken for Universities UK by Claire Callender will provide a more robust assessment of the incidence and impact of debt aversion amongst students from the lowest socio-economic groups. This will include an assessment of the relationship of debt aversion with the amount of term-time employment they undertake and the impact on their academic performance.

  19.  The evidence on concerns about the contributions to tuition fees suggests those concerns are of three kinds:

    —  amongst young people and their families from the lowest socio-economic groups who do not understand that they will almost certainly not have to contribute as a result of the operation of the means-test;

    —  amongst those students who are required to make a partial or full contribution but whose parents cannot or will not pay it and who are therefore forced to use their student loan to pay the contribution, estimated to be about 20 per cent of all students in 1998-99;

    —  amongst students and their families more generally, who either believe that tuition should be free as a matter of principle or believe that they were given insufficient warning of the introduction of the fee contribution system.

  20.  As a result of these concerns, the fee contribution is frequently cited as the main issue when it is in practice the most progressive element of the current package of student finance.

  21.  There is even less hard evidence about the impact of current financial support available for part-time undergraduates and the present arrangements have only been in place for one year. For students on benefits or on very low incomes, studying part-time, there is now public funding for fee remission and means-tested loan support towards study costs of £500 per year for up to six years, but these changes have only been introduced very recently. Claire Callender's study of student Income and Expenditure in 1998-99 (see footnote 1) suggests that part-time students are less likely to experience financial hardship because they continue to be in employment. However, given the widely differing types of part-time study, ranging from the Open University to intensive study in the evening at an institution, and the widely differing levels of support provided by employers to individuals to undertake part-time study, the reality of the current financial support arrangements for part-time undergraduate study may well be more complex. It would merit further study since increased participation by part-time mature students could have a significant impact on the achievement of the 50 per cent target


  22.  The available evidence suggests that the current system of financial support for full-time undergraduate students, with the emphasis on loans for maintenance with only very limited discretionary grant support, is having an adverse impact on the demand from young people from the lowest socio-economic groups for full-time higher education. The student financial support system is thus undermining the significant investment of time and resources by the government and institutions into the widening participation agenda. The system of tuition fee contributions does not contribute directly to this problem except insofar as there is widespread misunderstanding that most of the students from the lowest socio-economic groups will not pay fees.

  23.  Furthermore, the depression of demand from young people from the lowest socio-economic groups is putting at risk the achievement of the Government's target of 50 per cent participation in higher education by those aged 18-30 by the year 2010. Much of the required full-time undergraduate participation has to come from these groups because demand from those from the highest socio-economic groups is almost saturated.

  24.  The Government has to settle its priorities between funding for student support and funding for institutions, based on its judgement of the best package to deliver its target for increased higher education participation. It is clearly important that funding for student support is adequate to promote the expansion in demand for full-time undergraduate provision, particularly from young people from the lowest socio-economic groups. It will be a high priority, therefore, for the Government to reduce financial barriers to participation from these groups. This is clearly one of the main issues for the current Review.

  25.  Universities UK has fully supported the widening participation agenda and also, subject to the availability of sufficient funding for teaching and learning, supported further growth in participation that the Government is seeking. Universities UK now accepts the conclusions drawn from the evidence presented above that change is required to the financial support arrangements for full-time undergraduate students to reduce the financial barriers to participation from young people in the lowest socio-economic groups.

  26.  Universities UK recognises that any option for change in student financial support, especially if it involves the replacement of loans with grants to any significant extent, will almost certainly require additional funding, because as noted earlier loans have a lower resource cost—based on the estimated level of ultimate repayment and the interest rate subsidy—than grants for the same amount. Currently, the estimated resource cost of loans is only 35 per cent of the cash value of the current income contingent student loans at the time they are made.

  27.  Any additional costs of such changes will need to be met as part of any wider financial settlement for higher education. Improvements in student support must not be at the expense of funding for institutions. Universities UK argues that additional support for both institutions and students is required; the two needs are complementary.


  28.  Any options for change need to be measured against a range of desiderata. Discussions within the Board of Universities UK of an earlier draft of this paper led to the identification of the following principles that any options for change should meet:

    —  they should retain the current means-tested contribution to fees;

    —  they should substantially replace loans with maintenance grants for the poorest students;

    —  they should make the system of student support easier to understand for individuals and their families; and

    —  they should reduce the administrative burden of the current system.

  29.  There are two kinds of approach to developing options for change in the student support arrangements:

    —  to modify the current system to provide increased guaranteed financial support for students from the poorest families at the expense of reducing support available to those from the most well off families; and

    —  to consider more radical options for change, such as restoring mandatory grants for all students to the system linked to some system of graduate contribution. This type of approach needs to be included in the light of briefing given about the Government's own review.

Option 1

  30.  The first option (Option 1) would have the following characteristics:

    —  retain the means-tested contribution to fees;

    —  replace all of the student maintenance loan with a grant of the same cash value as the loan for those full-time undergraduates from the poorest families. These might be defined as those students from families living on benefit and those whose families are in receipt of working families tax credits;

    —  increase the proportion of the student maintenance support given as a loan from zero to 100 per cent on a means-tested basis so that those at the benefit level get 100 per cent and those whose residual family income is such that they make the minimum contribution, would as now receive their maintenance support wholly through an income contingent loan. The total of grant plus loan would remain the same as the current loan maximum;

    —  replace the limited discretionary hardship funds, with the exception of a small emergency fund, currently available via institutions; and

    —  retain the current means testing of one-quarter of the loan for students from better off families.

Advantages and Disadvantages of Option 1

  31.  This option of providing guaranteed grant funding to students from low income families in direct substitution for loans would:

    —  reduce the financial barriers to participation amongst those from the lowest socio-economic groups, although other barriers would remain;

    —  reinforce the other efforts being undertaken by institutions and other parties to attract more of those young people from the lowest socio-economic groups to enter higher education;

    —  remove entirely the threat of a substantial public loan burden from the students from the very poorest families and significantly reduce it for nearly half of all current undergraduates who are means-tested out of making any contribution to the fee. It might therefore reduce the amount of term-time working undertaken by these students;

    —  not of itself increase the total resources available to students from poor families, but would increase the public subsidy, which they receive by replacing loans with grants;

    —  be an expensive option in Public Expenditure planning terms since as noted already that the resource cost of loans is significantly lower than the cost of grants. This is considered further below;

    —  reduce substantially the complexity of administering the system by replacing discretionary hardship funding with more guaranteed grant support for students from the poorest families;

    —  do little to reduce the opacity of the present system since your entitlement would be even more dependent on means testing than in the current system; and

    —  leave the level of public support unchanged for those students from the best off families.

Cost of the Option

  32.  In costing this and the other options it is necessary to make a series of assumptions about the size of different groups within the full-time undergraduate population, in the absence of detailed data about the distribution of family incomes. We have used one million as the number of full-time undergraduates for ease of calculation since it is close to the UK figure. The Government has estimated that 50 per cent of students (or 500,000) will make no contribution to the fee in the current year and that 37 per cent (or 370,000) will pay the full fee. We have assumed that 20 per cent (200,000) will be eligible only for three quarters of the maximum loan and that one quarter of the students making no contribution to the fee (125,000) will be from families on benefit or in receipt of working families tax credits. Finally, we have assumed that the current loan take-up of 75 per cent is independent of family income and that there will be a 100 per cent take-up of any grants made available, although in practice the evidence suggests that students from poorer families are more likely to take out the full loan for which they are eligible. To the extent that loan take-up amongst this group is higher than 75 per cent the savings on loans would be that much higher.

  33.  It is also essential as we have already noted to bear in mind that the resource cost for public expenditure purposes of a student loan is considerably less than that of a non-repayable grant. The estimate of the resource cost of the current income-contingent student loans is about 35 per cent.

  This takes account of interest rate subsidy and the forecast of the loans that will never be repaid. Thus replacing a £100 loan with a £100 grant costs £65 in terms of the extra cost to public expenditure.

  34.  Assuming that 125,000 students are from families on benefit or in receipt of working families tax credit receive the maximum grant of £4,000 (and no loan and the remaining 375,000 students who currently make no contribution to fees are spread evenly across the income spectrum providing an average grant of £2,000, the total cost of grants would be £1.25 billion. This would be offset by the saving on loans of 35 per cent of £4,000 for 125,000 students and 35 per cent of £2,000 for the remaining 375,000 students—about £330 million, based on a loan take-up of 75 per cent. Rolling up most of the current discretionary hardship funding into the grant support would provide a further offsetting saving of £75 million giving a net cost for this option of £845 million.

  35.  A similar scheme with a maximum mandatory grant of £2,000 as is being introduced in Scotland instead of £4,000 and a corresponding reduction in the loan, but otherwise identical would have a net cost of £385 million, but would be likely to be less effective in tackling the problem of debt aversion amongst those from the lowest socio-economic groups.


  36.  These options are identical to Option 1 except that Option 2a would couple the changes introduced by Option 1 with an extension of the means-testing of amount of loan available for those from families with incomes above the current maximum of about £37,000. The amount available could be means-tested to zero or some minimum figure. Option 2b would as an alternative require those students with family incomes above the threshold to be charged a real rate of interest on their loans once they graduate: this would substantially reduce the public subsidy available to these people. Under both of these options the current means-tested contribution to fees would be retained.

Assessing Option 2 and Option 2b

  37.  These would retain the main advantages and disadvantages of Option 1 over the current system but would:

    —  Decrease the level of subsidy to students from better off families.

    —  Provide some modest additional offsetting savings to the cost of providing grants for students from the poorest backgrounds.

    —  Extend dependence on the means test substantially.

    —  Leave those students whose parents won't or can't pay their expected contribution to seek assistance from the commercial lending market, especially under Option 2a.

  38.  Neither these options nor Option 1 deliberately address the issue of contributions to fees. The re-instatement of in effect mandatory maintenance grants might help to reduce public pressure about the fee, but that is by no means certain given the decision by the Scottish Parliament and the moves by the Welsh Assembly to extend their powers to replace the fee with a graduate contribution scheme. The issue of fee contributions is considered in the context of the more radical option below.

  39.  These two options and Option 1 remain consistent with Universities UK's policy that those who benefit from higher education should be expected to make a contribution to its costs. However, Option 2 would increase the expected contribution from better off families at the time of study and decrease the proportion paid by graduates through loan repayments. Option 2b would increase the level of loan repayments for those from the most well-off families.


  40.  Assuming current take up of loans of 75 per cent applies to this group, the additional savings from extending the amount of loan means-tested to cover the whole loan so that those from the most well-off families receive nothing gives an average saving of £500 across 150,000 students or £75 million.

  41.  The savings from charging interest at the Government's cost of borrowing for those students only eligible for 75 per cent loan while keeping the loan fixed would be slightly smaller. Option 2b would reduce the resource cost of loans for this group to about 20 per cent and the savings are estimated to be about £66 million. The savings could be more if the effect of this change was to reduce loan take--up amongst students from more well-off families.

  42.  Table 1 below summarises the costs and offsetting savings arising from Options 1, 2 and 2b.

Table 1


Number of Students
Average Cost/(Savings)
Total Cost/(Savings)
Means-tested Grant up to £2,000 for students with family income below current fee threshold
Corresponding Reduction in Loan
Extension of means-testing of Maximum Loan Amount down to zero
Charging Real Interest on Loans for Students from High Income Families
Rolling Up of Current Discretionary Hardship Grants


  The calculation of the additional grant assumes that the 25 per cent of the relevant students will be from families on benefit or in receipt of family income tax credits and will receive the maximum amount of £4,000 of grant and no loan, and the remaining 75 per cent of those students who are not expected to make a contribution to the fee will receive on average £2,000 of grant and £2,000 of loan.

  The difference between the numbers involved in the calculation of the additional costs of grants and the lower figure used in calculating the savings on loans for the same group reflects the dead weight cost of replacing a loan with a mandatory grant.

  The charging of a real rate of interest is confined to those with family incomes above the level at which the maximum loan is currently restricted to 75 per cent of the full loan.

  43.  If all of the potential for offsetting savings were brought into play the net cost of a combination of Options 1, 2a and 2b would be about £720 million since the savings from charging real interest would be lower when combined with a reduced value loan for students from more well-off families.


  44.  It appears from the briefing given to the Press that the Government's review is considering more radical alternatives to the current system. The favoured type of option involves the replacement of the current living cost loans with grants for all, not subject to means testing, but coupled with a graduate contribution or graduate tax. It is not absolutely clear as to whether this option would also involve the ending of means-tested contributions to fees. However, the reference to "up front" fees in the Prime Minister's Speech strongly suggests that they too may be ended with all contributions to costs coming from the graduate contribution scheme. It should be noted that the option, at least at first sight, as floated is very different from the option adopted in Scotland where contributions cover only a proxy fee and are paid on graduation with income-contingent loans available.

  45.  There are two kinds of graduate contribution scheme, depending on whether there is a fixed maximum contribution, after which the graduate contribution is spent or whether the contribution is potentially open-ended (a graduate tax). Both of these options were considered by the Dearing Committee, but only in the context of providing a contribution to tuition costs. They were not considered s an alternative to meeting the costs of maintenance loans and grants.


  48.  Clearly an option of this kind would remove the question of debt aversion at a stroke and would be following the pattern in the Nordic Countries of treating higher education students as independent of their parents. It would on the same basis remove the current contribution from individuals and their families, particularly if contributions to fees were also ended. There would be likely to be some reduction in term-time employment, although the cash available to individuals would be no different than now. A move to a system of this kind might also increase the proportion of students choosing to study full-time, although the part-time market, both in the profile of students and the kind of programmes they are undertaking.

  47.  The main issues about this option are:

    —  its potential cost and the implications for institutional funding; and

    —  the implications for contributions to fees.

  48.  The cost of providing grants of £4,000 for everyone would be £4 billion while the offsetting savings on student loans would be slightly less than £1 billion after allowing for the lower resource cost of the loans and the current take-up of loans of about 75 per cent. However, if it proved possible to treat grants linked to graduate contributions in the same way as income-contingent loans for resource accounting purposes, the cost would come down significantly. With the same resource cost as loans of 35 per cent the cost would come down to £500 million which is simply the additional cost for those students who do not currently take out loans. Since the issue of determining the precise accounting treatment of elements of public expenditure rests with an independent committee, there may be strong doubts as to whether grants linked to a system of future contributions through the tax system can be seen as the same as a loan.

  49.  This analysis takes no account of the possibility that the Government might decide also to end means-tested contributions to full-time undergraduate fees. The Government's own estimate of the income to institutions in England from that source in 2001-02 is about £400 million. If the fee contribution were to be rolled up into a more general graduate contribution scheme, institutions would lose this income from contributions and this would have to be replaced by additional grant from government as has happened in Scotland following the implementation of the Cubie recommendations. This approach loses any concept of the students paying fees towards a specified service. Furthermore, any provision for UK students would also need to be made available for students from other EU countries. The Cost for these students in English HE institutions would be more significant than is the case in Scotland.

  50.  Overall the replacement of the current system of fee contributions with a deferred payment system would increase the proportion of institutional teaching income subject to central control and maybe put back for a generation the possibility of any move towards a more market driven system of fees as considered as an option for raising additional funding for institutions in the Taylor Report earlier this year. Furthermore, there is no tradition of hypothecation of taxes in the UK. To introduce the principle to Higher Education would pose questions for other sectors.

  51.  The principal model for graduate contribution schemes is the Australian Higher Education Contribution Scheme. That scheme is considered in more detail in Annex A to this paper.[3]

1   Callender C and Kemp M (2000), Changing Student Finances: income, expenditure and the take-up of student loans among full and part-time HE students in 1998-99. Research Report RD 213 for DfEE. Back

2   Published as a consultation document by HEFCE on 12 November 2001, Supply and Demand in Higher Education see Annex B in particular. Back

3   Nigel Brown Associates for Universities UK February 2002. Back

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