Education Bill

Memorandum submitted by Professor Nicholas Barr (Professor of Public Economics, London School of Economics and Political Science) (E 15)

1. These comments relate to paras 70 and 71 of the Bill, on student finance. Further details of the arguments can be found in Barr (2004, 2010) and Barr and Shephard (2010).

Comments specific to the Bill

2. Raising the cap on the interest rate on student loans is long overdue and entirely the right direction. As discussed in para. 5, the blanket interest subsidy in the current regime achieves not a single desirable objective.

3. Creating a level playing field between full-time and part-time study is highly desirable in terms of the efficient matching of students and courses and, separately, as an important element in widening participation, since part-time study offers the potential student a low-cost experiment. Adjusting the law to make this easier is both efficient and progressive.

Broader comments

4. OBJECTIVES. The objectives for higher education policy are to improve quality, to widen participation, and to increase the size of the sector so as to eliminate excess demand for places.

5. IT IS RIGHT TO INCREASE THE INTEREST RATE ON STUDENT LOANS to the government’s cost of borrowing or fractionally higher. The blanket interest subsidy in the current regime is harmful to the achievement of all of the objectives.

· It is hugely costly and therefore:

· Inimical to quality, since the high cost of student support crowds out university income.

· Harmful to access: because of their fiscal cost, loans are rationed in terms both of number and size.

· Restricts the size of the sector.

· In addition, the blanket interest subsidy is deeply regressive, mainly benefitting successful professionals in mid-career (for the argument, see Barr, 2010, section 3.3).


· Fees contribute to quality by increasing university income and, through stronger competition, by increasing the efficiency with which those additional resources are used. In contrast, undue reliance on taxpayer support results in inadequate resources for a mass, high-quality system of higher education, a fact that predates the economic crisis.

· Fees make it easier to expand the system, easing the situation for the significant number of applicants who currently cannot find a place at university. Note that this point interacts with reducing interest subsidies – the less ‘leaky’ the loan system, the lower the fiscal costs of expansion.

· An increase in fees is progressive, since university students come disproportionately from better-off backgrounds. Keeping tuition fees down perpetuates the middle class subsidy; raising fees reduces the subsidy, freeing resources to widen participation.

· Though it is right to increase fees, it is right to retain a fees cap in one form or another. Some universities, particularly the most internationally competitive, have an element of monopoly power, since a place at such a university is a positional good. The very high fees at US Ivy League universities are in part  an example of this phenomenon.

7. DO FEES HARM PARTICIPATION? The view that fees harm access is widely believed and intuitively highly plausible – and largely wrong. The evidence is powerful that the major barrier to access is attainment in school. Thus access is much more a 0-18 problem than an 18+ problem. Relevant actions to improve participation include:

· Policies to foster early child development;

· Action to improve attainment in school;

· Activities intended to improve information and raise aspirations;

· Financial support to encourage young people to stay on after age 16.

8. Given the range of such activities over the past decade, it is not surprising that participation has improved. HEFCE (2010) finds that ‘young people from the 09:10 cohort living in the most disadvantaged areas are around +30 per cent more likely to enter higher education than they were five years previously …, and around +50 per cent more likely … than 15 years previously’ (para. 28)

Comments outside the remit of the Bill, but relevant to the contents of the Bill

9. Other aspects of the proposed reforms, mainly outside the remit of the Bill, are less helpful.

· Abolishing EMAs and Aimhigher runs directly counter to the argument in paras 6 and 7.

· The conditions for loan repayment are such that a large fraction of loans will not be repaid. The resulting fiscal cost will hinder expansion.

· Abolition of T grant for the arts, humanities and social sciences ignores the extent to which higher education creates social benefits over and above its significant private benefits. It is a standard proposition in economics that in this situation, in the absence of a subsidy, demand will be inefficiently low: too few people will apply and/or a shortage of resources will put quality at risk. At a time of increasing international competition, this is exactly the wrong way to go.

February 2011


Nicholas Barr (2004), ‘Higher education funding’, Oxford Review of Economic Policy, Vol. 20, No. 2, Summer, pp. 264-283

Nicholas Barr (2010a), ‘Paying for higher education: What policies, in what order?’, Submission to the Independent Review of Higher Education Funding and Student Finance

Nicholas Barr and Neil Shephard (2010), Towards setting numbers free,

HEFCE (2010), Trends in young participation in higher education: core results for England, Higher Education Funding Council for England,