The Future of Higher Education

Written evidence from million+

About million+

1. million+ is a university think-tank which provides evidence and analysis on policy and funding regimes that impact on universities, students and the services that universities and other higher education institutions provide for business, the NHS, education and the not-for-profit sectors.

2. The landscape for higher education in the United Kingdom is changing rapidly with significant implications for universities, students and the higher education sector as a whole. million+ therefore welcomes the opportunity afforded by this BIS Select Committee Inquiry to submit evidence in relation to the conclusions of the Browne Report, the contents of the forthcoming White Paper, the Government’s proposals for widening participation and access, and the role and future of state funding in higher education.

The Role of State Funding for Higher Education

3. The Browne Review entered new territory in describing the public funding of university teaching activities as a ‘subsidy’ rather than an investment. This represents a step-change to the ‘partnership approach’ advocated in the Robbins and the Dearing Reports and the system introduced by the 2004 Higher Education Act which was based on the principle of ‘additionality’, whereby the extra income provided through tuition fees and graduate contributions was additional to the public funding provided by the Government.

4. million+ believes that state funding is an essential component of the globally recognised success of the UK higher education sector and should be regarded as an investment rather than a subsidy. There is a role for private and business investment too but state funding for higher education teaching and research enables the UK’s universities to play multiple roles in social, economic and cultural life that produce significant benefits for the UK.

5. Social: Supported by state funding, the expansion of higher education in the United Kingdom has reaped both individual and societal benefits. The graduate premium - the additional wage which a graduate can command as a result of their degree during their working life – has held steady over the past decade [1] , producing benefits for both individuals and the Treasury [2] . Based on research commissioned by the Royal Society of Chemistry, London Economics estimate that the lifetime net benefit associated with an undergraduate degree is approximately £117,342 for the individual and £81,875 for the Exchequer in 2010 constant prices. Modern universities in particular have also succeeded in increasing the participation of older students, those from ethnic minority backgrounds, students with disabilities and care leavers, groups that have traditionally been underrepresented in higher education [3] . More broadly the expansion of higher education teaching and research activities has improved levels of innovation and productivity in the UK and helped to sustain comparative advantage in the global economy [4] .

6. Economic: At national level universities generated more than £59 billion of output through direct and multiplier effects in 2007-8 and at least £5.3 billion in export earnings, supporting 668,500 full time equivalent jobs throughout the economy (2.6% of the UK’s workforce) [5] . Moreover public investment in universities generates significant spillovers in other sectors: for every £1 million of output from the UK higher education sector, a further £1.38 million of output was generated in other sectors of the economy in 2007/8 [6] . Universities also play a critical role in local economies as employers, purchasers and educators, acting as centres of knowledge and expertise around which regeneration and local economic growth strategies can be built [7] .

7. Cultural: Universities have always played a vital role in public intellectual and cultural life. State funding enables universities to teach undergraduate and postgraduate students, carry out basic and applied research that expands the frontiers of knowledge, undertake knowledge transfer activities with businesses and not-for-profit organisations that ensure that the benefits of academic research are realised more widely. Universities also engage with local communities and work with local partners to raise aspirations and promote civic and cultural engagement.

8. million+ is concerned by the direction of travel set out in the Browne Review and subsequently adopted by the Government. As the OECD have highlighted, state funding for higher education is a rational investment in the future of individuals, society and the economy because it yields significant and stable returns [8] . Public funding for higher education should therefore be treated as an investment rather than a subsidy.

The Browne Review and the Government’s Response

9. Following the final report of the Browne Review, the Government developed proposals to reform the funding of higher education for new entrants in 2012-13 and beyond. Effectively, from 2012 public investment will be removed from most undergraduate courses and responsibility for the future funding of university teaching will be transferred to the individual. The cap on tuition fees in England will rise to between £6,000 and £9,000 to allow universities to offset the reduction in funding that will result from the reduction of the annual teaching grant from £3.5bn to just £700m, and the student finance and student loan repayment systems will alter concurrently.

10. Treasury accounting mechanisms mean that fee loans to students are accounted for differently to the direct funding of universities through the provision of teaching grants. The transfer of funding from the state to the student was therefore positioned as a means of reducing the deficit whilst continuing to invest in higher education and enhancing student choice. million+ was critical of the Government’s proposals to withdraw direct state funding for the majority of university teaching activities and increase the cap on tuition fees to between £6,000 and £9,000 on a number of grounds [9] .

11. First, the new funding system may impact adversely on social mobility and participation irrespective of the specifics of student finance arrangements and graduate repayment structures. In economic terms, an increase in price would normally be assumed to weaken demand. An Ipsos MORI survey of 2,700 11-16 year olds in the first half of 2010 found that the prospect of even low level increases in tuition fees had significant deterrent effect on participation amongst young people, particularly amongst those from the most disadvantaged backgrounds [10] . Amongst those who said they were likely to go to university under the current fee system, one in six (17%) said they were unlikely to go if tuition fees increased to £5,000 and almost half (46%) if fees increased to £10,000 a year [11] . These findings were reinforced by an unpublished survey commissioned by the Browne Review which found that students and parents viewed tuition fees of £6,000 as ‘the highest reasonable amount’ that should be charged [12] . The risk also extends to older prospective undergraduates as mature students have been shown to be highly price sensitive [13] and more debt adverse than young students [14] , and to participation in postgraduate level education. The impact of the uncertain economic climate of family finances and debt adversity must also be taken into account. Any reduction in demand will have consequences for individuals, universities, businesses and the Exchequer due to ‘lost returns from lost graduates’.

12. Second, the new funding system will lead to most graduates being worse off. The higher repayment income threshold means that graduates will pay less per month towards their student loan than under the present system but overall student debt levels will be much greater and these loans will accrue interest at a significantly higher rate. Depending on their household income, the overall rate of inflation and whether tuition fees and maintenance loans are uprated in line with inflation, students on a 3 year course at a university charging £9,000 a year could graduate with more than £53,000 worth of debt (see Tables 1-4, Annex). Graduates will also repay loans for longer. When the earnings repayment threshold, male and female participation and the ‘all-in’ costs of the proposals are taken into account, million+ and London Economics have concluded approximately 60-65% of graduates will be worse off than under the current system, with those on middle incomes hit particularly hard [15] .

13. Third, the new funding system is unlikely to provide good value for taxpayers. The Government will have to borrow significantly more to fund student loans for the higher fees which universities will be forced to levy under the new funding system. The independent Office for Budget Responsibility have estimated that increasing tuition fees will require the Government to borrow £10.7 billion to fund student loans in 2015/16 compared to the £4.1 billion it borrowed in 2010/11, and that the higher cash requirements will cumulatively add £13 billion to public sector net debt by 2015/16 [16] . Repayment rates and the resource accounting and budgeting (RAB) charge on these student loans are therefore of great significance but the Government’s estimates rely on a series of assumptions. The Government has yet to publish an updated Equality Impact Assessment that takes account of the late amendments to extend fee loans to more part-time undergraduates and to uprate the repayment threshold in line with inflation.

14. million+ welcomes the extension of fee loans to part-time undergraduates studying at the rate of at least 25% of a full time degree course as this rectifies a historic imbalance in the provision of financial support for part-time students. The extension of fee loans must however be balanced against the much higher pro-rata fee levels that part-time students will be charged and the fact that part-time students earning more than £21,000 will be liable to repay fee loans from the April three years after they commence study, even if they are still studying [17] .

15. The premise of the Browne Review was to secure a sustainable future for higher education in England. million+ has doubts about the financial sustainability of the funding regime that will be in place from 2012-13 onwards and is concerned that the Government’s plans have not been subject to sufficient scrutiny. It is estimated that just 30% of students who graduate under the new system will repay the full amount of the tuition and maintenance loans they borrow to fund their studies, which means that much of the additional cost of the new system will be borne by the taxpayer. Research by the House of Commons Library indicates that the taxpayer would have been better off if university teaching funding had been cut by less than 80% and the fee cap was commensurably lower [18] .

16. As Sir Alan Langlands, Chief Executive of HEFCE, has highlighted, the reductions in public funding for university teaching activities are the consequence of the financial crisis and the budget deficit and the post-Browne review settlement should not be viewed as permanent [19] . At the very least, the Government should seek to restore teaching funding at the earliest opportunity as the economy recovers.

The Higher Education White Paper

17. The funding regime is not the only aspect of higher education that is subject to change. Universities also face uncertainty around Tier 4 visa regulations for international students, the future of the Widening Participation Premium and the institutional London Allowance, the costs of Access Agreements and the National Scholarship Programme, and the future of the Department for Education’s Initial Teacher Training and the Department of Health’s Multi-Professional Education and Training (MPET) funding streams. In combination with the changing funding structure, these issues and the delayed publication of the Higher Education White Paper means that universities face considerable uncertainty.

18. Ministers have nonetheless hinted at the intended direction of travel within the White Paper. It is proposed that private providers of higher education will be allowed to access additional government funding through the provision of larger government-subsidised tuition fee and maintenance loans to students at private institutions [20] . It is also proposed that degree awarding powers will in future be available to organisations that do not teach. These measures have been portrayed as a means of increasing competition, regulating tuition fee prices and enhancing the student experience [21] but they lack a real understanding of the nature and purpose of higher education, a form of education that is at the cutting edge of an academic subject and which demands high levels of research-informed scholarship from staff and students. These measures also raise a number of important questions about the regulatory environment and the quality of the UK higher education brand.

19. First the Government must realise that pressure on the student loan book is the result of its creation of an economically inefficient funding system. BIS have estimated that English universities will charge average fees of £7,500 in order to make-up for the loss of teaching funding [22] but there are a significant number of additional uncertainties that universities will have to take into account when determining tuition fees. The greater the uncertainty around additional funding streams such as the London Allowance and the Widening Participation Premium, the higher the fees that universities are likely to charge as a means of managing the associated risk. Universities need to be able to set fees that protect and promote both the quality of the student experience and the long-term financial sustainability and success of institutions.

20. Second, UK higher education has a very strong national and international reputation for quality that must be maintained. If private providers are able to access public money through the provision of state loans and maintenance grants to eligible students at these institutions then private institutions should be subject to the same quality assurance standards and requirements as public universities to ensure that high standards are maintained throughout the sector.

21. Similarly there are significant risks associated with the plans to grant degree awarding powers to institutions that do not teach as a means of increasing competition in the sector and regulating tuition fee prices. For centuries institutions have had to earn the right to the university title, a title which denotes adherence to the highest possible standards and commitment to rigorous academic governance. Any move towards lowering the criteria for new entrants risks damaging both the quality of the student experience and the strength of the UK higher education brand.

22. The Government must also address the complex issue of student number controls. Student numbers have already been reduced by 10,000 for the academic year 2012 and if numbers are further reduced in response to fee levels then there is a risk that the progress that has been made towards widening participation will be reversed. The other proposal that has been mooted, of a move to a ‘core and periphery’ model whereby universities and other providers bid for additional student numbers on the basis of provision at a lower price, also carries risks. It is not clear how this system would work given that funding will in future follow the student and the inequity that would be associated with charging students on the same course different fees. The creation of an expectation of delivery at low cost also risks damaging the student experience and the UK higher education brand.

23. The White Paper must also resist calls for further concentration of public funding for university research. Research funding in the United Kingdom is already very highly concentrated in a small number of traditional institutions: in 2008-9 more than half (50.4%) of all funding council (QR) and research council funding was awarded to just 12 universities and more than three quarters (75.4%) was awarded to just 28 higher education institutions [23] . Modern universities receive very modest quantities of public research funding but use it to undertake high quality research in specialist areas and to leverage comparatively more investment from alternative sources than so-called ‘research intensive’ universities [24] . The 2008 Research Assessment Exercise (RAE) showed that research prowess is widely dispersed across the sector with pockets of research excellence existing in virtually all universities. A diverse array of subject groups at a diverse array of institutions produce world-leading and internationally excellent research that informs teaching at undergraduate and postgraduate level and enables all students to benefit from research-informed curricula. million+ believes that excellent research should be funded wherever it is found.

Social Mobility and Opportunity

24. million+ welcomes the emphasis that the Government has placed on improving levels of social mobility but is concerned that the Government has only a partial understanding of social mobility in relation to universities. To date Ministers have focussed primarily on increasing the number of high achievers from disadvantaged backgrounds who progress to a small number of traditional universities rather than on ensuring that more disadvantaged students are able to participate in higher education [25] .

25. Fair access is important but ensuring that a few more students from disadvantaged backgrounds are able to attend particular universities is unlikely to lead to a step change in levels of social mobility in England. Social mobility is more properly understood as the extent to which participation in higher education enables graduates to enter employment and professions that are associated with higher socio-economic occupations and earnings, when compared to their socio-economic backgrounds when they first entered university.

26. Widening participation is about transforming the lives of large numbers of students who otherwise would not have gone to university, ensuring that they are able to fulfill their potential and access high skill employment opportunities. Modern universities make an outstanding contribution to widening participation and transforming lives on a scale that that should be both valued and promoted by the Government [26] .

27. To ensure that progress on widening participation is maintained, the Government should commit to protecting the ‘Widening Participation’ premium that is currently paid to institutions in recognition of the higher costs associated with teaching students from disadvantaged backgrounds. The Government should also re-think its plans for the National Scholarship Programme (NSP). Whilst the Government’s commitment to assist students from disadvantaged backgrounds with the cost of attending university is welcome, million+ has a number of concerns about the workings of the NSP as outlined in February 2011 [27] .

28. First, the NSP bears little relation to the scheme that was originally discussed by Ministers [28] or the national scheme with national eligibility criteria that million+ advocated [29] . Instead, institutions will set their own eligibility criteria for students from disadvantaged backgrounds and determine the nature of the scholarship award that eligible students from disadvantaged backgrounds receive. This level of variation between universities and the high degree of complexity that it entails will create a muddled ‘postcode lottery’ whereby students from identical socio-economic backgrounds receive different types and levels of benefit depending on where they study. This is unlikely to encourage more students from disadvantaged background to apply to university.

29. Second, the requirement to match-fund allocations from the NSP pot may be particularly onerous for modern universities which currently teach a very high proportion of all university students who come from disadvantaged backgrounds [30] and do not have substantial endowment incomes [31] . OFFA will have discretion over match funding levels in 2012-13 but there are no allowances after 2012-13 and the starting assumption is match funding at a 1:1 ratio. Universities with the most socially inclusive profiles may have to raise fees for all students in order to ensure that they can provide match-funding under the NSP.

30. Third, whilst the HEFCE guidance clearly states that the NSP will provide students with a one-year benefit only, the Government’s contribution to the NSP is set to increase over the three year period. No explanation has been given as to why National Scholarship Programme funds – and hence university match-funding liabilities – will increase from £50 million in 2012-13 to £150 million by 2014-15. Variable funding over the three year period will lead to significant alterations in institutional NSP eligibility criteria between academic years which may create perverse incentives for prospective students to delay applying to university.

31. The National Scholarship Programme has laudable aims but is unlikely to encourage participation by students from low income backgrounds in its current form. It will also be financially burdensome and administratively complex for modern universities. The Government should go back to the drawing board at the earliest opportunity to devise a national scheme with national eligibility criteria.

Conclusion

32. The landscape for higher education in the United Kingdom is changing rapidly. million+ is concerned by the direction of travel that was set out in the Browne Review and subsequently adopted by the Government. State funding is an essential component of the globally recognised success of the UK higher education sector and there is a clear role for state funding for the sector both now and in the future. It is vital that state funding is treated as an investment in the future of individuals, universities and the nation, rather than as a subsidy.

33. million+ has doubts about the efficiency and financial sustainability of the funding regime that will be in place from 2012-13 onwards and is concerned that the Government’s plans have not been subject to sufficient scrutiny. Care must be taken to ensure that neither the UK’s strong reputation for higher education nor the quality of the student experience at UK universities are damaged by belated attempts to regulate tuition fees.

34. Above all, there is a real risk that the new funding system may impact adversely on social mobility and participation, undoing the progress that has been made over the past decade. The Government must, in partnership with the higher education sector, work swiftly to develop a clear and effective communications strategy that ensures that students from all walks of life continue to see higher education as a worthwhile investment with significant and long-lasting rewards.

10 March 2011

Annex

Tables 1 - 4: Impact of RPI and a real rate of interest on student debt accumulation whilst studying

The modelling assumes that fees and maintenance loans are uprated annually in line with inflation. In January 2011 the Retail Price Index stood at 5.1% and inflation is set to remain high in the immediate future so million+ have modelled student debt levels on this basis. In reality student debt levels will vary according to RPI which has been as low as -1.6 (June 2009) and as high as 5.4% (April 2010) in the last 5 years.

Table 1: Fees of £6,000

Table 2: Fees of £7,500

Table 3: Fees of £9,000

Student debt levels have been modelled using the universal maintenance loan of £3,575 per year which all students will be eligible for irrespective of household income. Students from households earning up to £42,600 will be eligible to borrow between £3,875 and £5,500 [32] annually and their overall debt levels will be concurrently higher if they take out the full loan they are entitled to. A student studying on a £9,000 course who is eligible for the maximum £5,500 annual maintenance loan could graduate with a debt of £53,439.

Table 4: Fees of £9,000 with maximum maintenance loan

Table 5: Endowment and Investment Income 2008-9

Source: HESA Resources of HEIs 2008-9

Table 6: UK-domiciled students with known ethnicity 2008-9

Source: Equality Challenge Unit (2010)