Student Loans Contents

3Is there a market in higher education?

The marketisation of higher education

69.Higher education has undergone a process of marketisation in recent years. The Browne Review—an independent review of higher education funding and student finance, led by Lord Browne and published on 12 October 2010—contributed significantly to the reforms that sought to introduce this marketisation.71

70.The Browne Review envisaged a higher education market in which institutions “actively compete for well informed, discerning students, on the basis of price and teaching quality, improving provision across the whole sector”.72 In his evidence to the Committee, Lord Browne commented on the extent to which the current system resembles that proposed by the Browne Review:

When we set up our report, we proposed something entirely different: first of all, that universities should only charge the basic cost of educating someone on a deskbased or lecturebased subject, and that expensive subjects should be supported by subvention from the Government. That fee would be £6,000, not £9,000. Secondly, we said that we would make sure that things like the interest rate would be at the Government’s cost of borrowing. We felt, therefore, it was appropriate that the Government should pick up bad debts, but of a different scale, because educating the population was a good thing to do.

[…]

Our proposal was a system, and strangely I regret that we did that, because the system only works if you have bought the whole thing. If you kept changing bits, it started not working73

71.When asked whether the current system was preventing a functioning market, Lord Browne agreed: “Without information and with caps, constraints and boundaries, many markets fail, and this is no exception”.74 In its 2017 report on the higher education market, the National Audit Office (NAO) described the marketisation process as follows:

The government has increasingly delivered higher education using market mechanisms, relying more on student choice and provider competition to improve quality and value for money. Some 85 per cent of up-front funding now directly follows student choice (up from 23 per cent in 2007–08) via tuition fee loans, which the Department increased from £3,000 to a maximum of £9,000 in 2012 while reducing grant funding accordingly. The Department also removed student number caps from 2015–16, to increase access to more young people and allow popular providers to expand.75

Competition on the basis of price

72.The proposals put forward by the Browne Review were designed to generate price competition between universities. The specific tuition fee model proposed in Lord Browne’s report involved no price cap, but a levy on fees above £6,000 paid by the university to the Government. Lord Willetts said of the proposal:

John Browne’s report is the most ingenious attempt at getting price variation in higher education that I have come across, and his proposal—to avoid it just being university fees and loans going up and up and up—was that you should have £6,000, and then above that universities could charge higher and higher fees, but there would be a levy extracted from them, in the words of his report, “to cover the costs to Government of providing students with the upfront finance.”

The argument was that [for] every extra £1,000, the proportion that we pay back must get lower and lower and lower, so there would be a levy, and it was going to be 40 per cent on the first £1,000 up to 75 per cent if you are on £12,000 fees, which was a very ingenious model.76

73.However, the Coalition Government chose not to introduce this model. In his statement to Parliament announcing the Government’s proposals in 2010, Lord Willetts said:

Lord Browne suggested that there should be no cap on the graduate contribution. We believe that a limit is desirable, and are therefore proposing a basic threshold of £6,000 per annum. In exceptional circumstances there would be an absolute limit of £9,000.77

74.Research by the IFS found that, in 2016, all but three of the top 90 institutions charged fees of £9,000 per year for all of their courses.78 The Committee therefore examined whether, under the current system, there is any logic in expecting universities to compete on price, and for students to choose what and where to study on the basis of price. Dr Andrew McGettigan told the Committee that the nature of the student loan system dictates that a tuition fee cannot function as a price because, for many students, the fee charged will have no impact on the amount that is ultimately repaid:

Because we have an income contingent repayment loan scheme, the tuition fee is not a price. It is not that it is not price sensitive. It is not a price. You may be faced with choosing to go to an institution that is charging £6,000, or one that is charging £9,000. You are also taking out maintenance loans, and let us say you go outside London, so you may graduate with over £40,000 rather than around £50,000 [of debt]. In terms of what repayments you are likely to make as a graduate, you may see no difference, particularly now that the repayment threshold is over £25,000. If you are meant to be a cost-sensitive, informed consumer, there is no difference. […] The tuition fee cannot signal like a price once you have a large subsidy built into the scheme. You are trying to do two contradictory things. On the one hand you have a loan scheme that is trying to mimic a proportionate, if not a progressive, graduate tax. On the other hand, you are trying to use a price signal to achieve everything that you are meant to get from efficient markets. The Browne Report in 2010 said price is the single best indicator of quality. It can do no such thing in this situation.79

75.He went on to explain why this contributes to the lack of variation in tuition fees:

That is why it [the tuition fee] is the same at every institution. If you are faced with this decision and you think, “I could go to that one that is charging £7,000 or that one that is charging £9,000”, you go to the one charging £9,000. That is £2,000 per year per student that is going into the institution, even if it is not being spent directly on you. That is going to play out in all sorts of ways in the long run, such as institutional prestige. If it goes into research you will get the institutional prestige benefit.80

76.Commenting on the prospect of students choosing where to study on the basis of the tuition fee, Lord Willetts said:

When you have a graduate repayment system that is as generous as it is, any student who said, “I am going to Leeds because it is £7,500, and I want to save money on York, which is £8,250”, would not really be understanding the basics of the system.81

77.The NAO noted that “There is no meaningful price competition in the higher education sector […] Providers are incentivised to charge the maximum, even for courses that cost less, because not to do so could suggest poor quality and reduce demand instead of increase it.”82

78.Former Universities Minister Jo Johnson provided a slightly different explanation of why almost all university courses command the maximum fee, focussing on the costs and revenue associated with teaching. He said:

It is not surprising, in a system in which you have a cap that is set at this level, that you are not seeing much price differentiation between providers at the moment. Most bands of courses are in deficit on teaching, in terms of their teaching costs versus the revenue they get in. In that situation, you would expect them to be charging as close to the cap as they can.83

79.In implementing the 2012 reforms, contrary to the recommendations of the Browne Review, the then Coalition Government chose to introduce a cap on tuition fees. The evidence provided to the Committee suggests this was done in the knowledge that it would create a market with no meaningful price competition. Whether price competition in the higher education sector could ever be a realistic, or desirable, prospect—even without a tuition fee cap—is debatable; the incentives for students to choose courses that command smaller tuition fees are weak.

80.Nevertheless, the Coalition Government’s expectation in advance of the 2012 reforms was that competition from new market entrants—combined with additional obligations for those universities choosing to charge above £6,000—would lead to prevailing tuition fees of around £7,500. It is overwhelmingly clear that this was a naïve assumption. Given that fees are almost universally well in excess of the level the Government intended when introducing the new fee regime, the Government should explain, and explore in its expected review, why the higher rate of fees being charged is desirable. In England, the consequences of reducing the maximum tuition fee to £7,500 or £6,000, as some have advocated, would be that the highest earning graduates pay less, and the level of funding for universities would be reduced, without either a significant increase in subsidy from the taxpayer or, more likely, the reintroduction of caps on student numbers.

Competition on the basis of quality

81.The Browne Review envisaged competition between universities on the basis of quality, as well as price. In its report on the higher education market, the NAO said of competition on quality:

Market incentives for higher education providers to compete for students on course quality are weak. The relationship between course quality and providers’ fee income is weak. We found that, on average, a provider moving up five places in a league table gains just 0.25 per cent of additional fee income through increased student numbers.84

82.Multiple witnesses told the Committee that universities compete fiercely to recruit students. Lord Willetts commented that:

We do have competition, in a better form than price competition: we have competition to recruit students. […] Since the removal of numbers control, universities compete very actively for students, and some have grown a lot, and others have shrunk. It is competition, driven by student choice.85

83.Competing to recruit students could see universities seeking to attract applicants by ensuring courses are of high quality, but could also be manifested through significant investment in marketing and advertising. The NAO noted:

Providers are attempting to attract students by investing more in marketing and in facilities, with capital investment in English universities increasing from £2.35 billion to £3.80 billion between 2011–12 and 2015–16. Stakeholders we spoke to were concerned that this investment would not lead to a proportionate increase in teaching quality, and was unsustainable.86

84.The current structure of the higher education market creates financial incentives for universities to recruit more students, yet the NAO has found that market incentives to achieve such expansion by improving course quality are weak. It is wrong to assume that the competition to recruit more students will be played out through competing on the basis of quality. If pursued recklessly, the aim of attracting ever greater student numbers can be damaging. The fact that university spending on marketing is increasing shows that universities can compete in ways that do not deliver any educational improvements. The market mechanisms the Government has applied to the sector are not, in and of themselves, sufficient to drive meaningful improvements in quality.

Student choice

Information available to students

85.The Browne Review noted that “students need access to high quality information, advice and guidance in order to make the best choices”, and that they must be able to adequately assess the relative quality of different courses.87 Former Universities Minister Jo Johnson told the Committee:

Informed choice is absolutely critical to the operation of the higher education system, and I have been concerned that students are making choices based on factors that are not necessarily the ones that they should be prioritising. People have been prioritising where their friends are going to university, where the nightlife is great and so forth. We need them to be focusing on where the teaching is of the greatest quality and where the student outcomes are best.88

86.The Committee took a range of evidence on the impediments to informed choice that exist in practice, including the lack of an effective price signal as discussed earlier in this report. Dr Helen Carasso—a higher education academic at St Anne’s College, Oxford University—explained that higher education is an “experience good”, in the sense that necessary information (in this case, on teaching quality) is only available after it is of any use.89 Professor Janet Beer—Vice Chancellor of the University of Liverpool and President of Universities UK—told the Committee that there is “too much information out there” for prospective students, while Lord Willetts commented that “information for students is still not good enough”.90 The NAO also noted that while the provision of information has improved, its use is not widespread.91

87.The Committee heard that in the absence of a functioning price signal, students may use other metrics to judge the quality of courses. One such metric is the Teaching Excellence Framework, which Dr Andrew McGettigan described to the Committee as “a synthetic signal: gold, silver or bronze. It is meant to be quite simple for people to grasp in the absence of a price signal.”92 Jo Johnson also noted that the Framework is seeking “to provide students with another signal of where quality can be found in the system”.93 Dr Helen Carasso mentioned that a university’s entry tariff can also serve a similar purpose, saying:

They [applicants] see [the entry tariff] as being a proxy for quality and the prestige of the qualification they are coming out with. It is a crude proxy, but that is how they perceive it.94

88.If the Government is committed to creating a higher education market that functions effectively, it must take steps to improve both the quality and dissemination of information. Without adequate information, an efficiently functioning market will struggle to develop. Prospective students face the unenviable task of determining whether to participate in higher education based on increasing quantities of university marketing material coupled with a lack of proven, reliable metrics for judging the quality of courses. It is vitally important that students are able to make informed choices about what and where to study. Such decisions are typically taken at a relatively young age, yet they carry significant long-term implications.

89.The Committee notes that the Office for Students will be tasked with developing the Teaching Excellence Framework further by taking it to subject level. This is a sensible step, but the Committee fears the Government’s efforts may be wasted if it fails to address the fact that so few students are currently making use of information that is already available.

71 BIS, Securing a Sustainable Future for Higher Education: An Independent Review of Higher Education Funding and Student Finance (2010)

72 BIS, Securing a Sustainable Future for Higher Education: An Independent Review of Higher Education Funding and Student Finance (2010), page 8

73 Q98, Q112

74 Q116

75 National Audit Office, The higher education market, 8 December 2017

76 Q116

77 Oral statement to Parliament, Statement on higher education funding and student finance, 3 November 2010

78 IFS, Higher Education funding in England: past, present and options for the future, Briefing Note BN211, July 2017

79 Q9

80 Q9

81 Q103

82 National Audit Office, The higher education market, 8 December 2017