Undergraduate fees

The UK has had a student loan system for tuition fees since the Blair government introduced them in 1998

That was 20 years ago. Today, the prime minister Theresa May appeared to finally acknowledge pressure from those against the system by criticising the levels set by universities. Some may say that’s a hollow response, given that a rise from £9,000 to £9,250 was recently approved. Added to that, the opposition Labour Party has committed to scrapping tuition fees completely in a beauty parade for student votes.

But it’s not just the presence of the fees that causes complaints. It’s the rate of interest applied to the consequent debt, currently 6.1%, that’s considered unfair. AFter all the government pays nothing like that much to borrow the money in the first place.

Value for money?

People like me have been ranting about the poor value for money for years. Some courses have only a few hours per week contact time, including lectures to over 200 students and tutorials provided by (lower paid) postgraduate students. How can that possibly cost £9,250 each year? The answer is – we don’t know. University finances are opaque to say the least. And while some courses, like medicine, might even cost more than that to provide, without transparent accounting we simply don’t know. It’s likely that much of the revenue from undergraduate fees disappears into “allocated costs” centrally, which not only pay for administration and general services like the library and IT, but also funds research, university initiatives, and vice chancellor salaries which have nothing to do with undergraduates.

The £9,250 is a maximum, of course. Universities can charge less if they choose, but few do. It would be called a cartel if it were commercial service providers we were discussing. With demand so high for university places, they have no trouble recruiting undergraduates.

Repaying student loans

Arrangements differ around the UK. But an English undergraduate in England is taxed at a rate of 9% on annual earnings above £21,000 until the loan is paid off, with interest. This means that some students will never pay off their loans. In fact some will never pay a penny. Estimates vary, but figures as high as 80% of students who will not repay their debt are doing the rounds. Put differently, the taxpayer funds universities more than the students themselves.

Why such a high interest rate?

We might argue that 6.1% interest rate for an unsecured loan is good value. But is that correct? The loan is secured – against future earnings. It is guaranteed to be repaid, in fact, given that the amount demanded is linked to earnings. Which means the government is making money on the difference between its own borrowing costs and the 6.1% charged to the graduate.

Some might argue that account must be made for students who don’t repay their loans. But that doesn’t stand up to scrutiny. Why should graduates repaying their loans bear the burden of those who don’t any more than other taxpayers? Others might argue that with so many young people going to university, almost half of school leavers in fact, the cost of maintaining so many students has to come from somewhere. Again, this is hardly the fault of the student. It’s government policy.

The interest rate is set by equation. But it’s a punitive rate and many politicians now agree something needs to be done about student debt. As Jeremy Corbyn said, perhaps ambiguously, “I will deal with it”.

An alternative model of undergraduate finance

The model I propose here, as it turns out, is largely agnostic as to whether the government or the student foots the bill. It’s aimed at universities and their responsibilities for being in a privileged position of providing higher education.

As mentioned earlier, the opacity of how the fees are accounted for must end. The easiest way of doing this means creating an undergraduate school within each university as a semi-autonomous legal entity in its own right. This is the minimum requirement for the ring-fencing of undergraduate education provision that underpins everything, and echoes the ring-fencing imposed on UK banks vis-a-vis separating their retail (“boring”) business from their investment banking (“risky”) business.

Having created an undergraduate school with its own executive and public accounts, a degree of autonomy must follow. Rather than the current practice of using undergraduate fees as a cash cow for other university expenditure, the undergraduate school will not be forced to buy services from the university, if it can do better elsewhere. Economies of scale might make this unlikely, but this is an essential part of providing value for money for undergraduates. While a separate library would be folly, procuring teaching resources and space for learning will not be. Again, the university should make the undergraduate school an offer it can’t refuse regarding teaching and rooms rather than just imposing its costs on them.

Finally, the undergraduate school will have the power to set the level of fees, rather than the university. It can be audited and regulated to make sure it’s run on a not-for-profit basis too, if required. Indeed executives could even be incentivised to reduce fees.

In summary

While the provision of student loans presents its own issues, both in terms of the cost to students and the levels of interest applied thereafter, universities themselves need to do more to justify their costs.

This isn’t a free market in education. It’s a market with a high demand owing to the availability of funding, and that would be true if the government paid the fees or the student. There is little in place to push fee levels down other than the cap, currently £9,250 per year.

However with undergraduate education provided by ring-fenced entities tasked with getting the best value for money for their students, the system becomes more transparent and gives undergraduates better value for money. While undergraduate schools should serve students better, it’s likely that university finances elsewhere will suffer. I haven’t addressed this part, but it follows that if universities want funding for research and other initiatives then they must justify that separately by applying for funding.