Universities, lend a thought to funding

A more radical solution would be for universities, not students, to take out loans from the Treasury to finance undergraduate tuition

A graduate tax, the stated long-term policy aim of the Labour Party, is a solution to a non-existent problem.

It is clear that the increase in tuition fees, with fees paid through loans rather than up front, has not deterred those from deprived backgrounds with eligible grades from attending university. A record number of young people from the poorest homes have applied this year. All a graduate tax would do is put the Treasury, rather than students, in charge of the distribution of resources, thereby weakening the pressure on institutions to provide relevant and high-quality courses.

But it is true that the current university funding model is becoming increasingly unsustainable. The government now estimates that it is likely that about 45 per cent of all money loaned will not be repaid, much higher than the 28 per cent originally forecast.

One often overlooked reason for this is the decision by most universities to raise their fees close to or right up to the £9,000 cap. They did not need to do this. To compensate for the loss of direct state subsidy, in 2010 Universities UK estimated that institutions needed only to lift them to, on average, just over £7,000.

Most universities are in good health: Times Higher Education’s recent financial health check of the sector reports a surplus of £1.1 billion. In fact, many universities were not justified in lifting their fees by so much: average degree quality – as measured by metrics such as contact time and student satisfaction – has hardly budged for years.

There is little risk for universities in clustering their fees at the top end of the price range. Students are not that price-sensitive when they are not paying anything up front. If graduates do not earn enough in the labour market to repay their loan in full, it is the public purse – not universities – that takes the hit.

Theoretically, the removal of the cap on student numbers should make over-priced institutions and courses more vulnerable. But the expansion of good universities relies on much more than lifting the cap, including having sufficient infrastructure on campus and overcoming the conservatism of universities’ leadership.

So a different route to a financially sustainable system needs to be found. One idea is for universities to contribute to the loans subsidy themselves. This could be done collectively, with all institutions contributing a small proportion of their fee income to a pot of money the government can then use to cover written-off loans.

Or, perhaps more fairly, the cost of written-off loans could be covered by individual universities. If a university charges high fees but few of its graduates pay off their loans, the government should find a way of getting that institution to cough up. It could, for example, reduce the amount the university receives in teaching grant in future years. If the amount deducted were sufficient, this could deter universities from overcharging in the first place.

An alternative, more radical, solution would be for universities – rather than students – to take out loans from the Treasury to finance undergraduate tuition. These loans would be repaid through the earnings of a university’s graduates, who – in an “equity contract” with their university – would pay their loan back to their alma mater through the PAYE system under the same parameters as now.

Under this system, universities could charge their graduates what they wanted. But they would be wise to lend only what they would expect to receive back from each cohort of graduates. This would result in the state paying considerably less, while low-earning graduates would pay the same (nothing until they were earning more than £21,000 a year). Universities would be exposed to greater risk, but they could potentially derive much greater rewards, too.

It is important for individual and national prosperity that more people go to university. But, over the decades, the state and students have ended up paying more to achieve this expansion. It is time for universities themselves to play a greater role in the funding system.