Part two – a brief history of funding

In the second of three blogs on ‘Higher Education funding: are there any sustainable options?‘ by GuildHE’s Chief Finance Officer Mark Taylor, we explore the impact of higher education funding models over the last 30 years, from Dearing to Augar and beyond.

1992 – 2006

The initial post-1992 years relied exclusively on grant funding for higher education, managed by the new body HEFCE. The key report in this period was the Dearing Report, published in 1997, which proposed that the cost of higher education be shared between the Treasury, students, and the employers who were the economic beneficiaries of the system.

By 1998 the unit of resource had declined to the point where a step change was required, and this came in the form of the £1,000 tuition fee for Home students, paid up front, usually by parental contribution. The £1,000 fee was a top-up to redress the falling real value of the teaching grant. Fee waivers were available for low income students. 

The system soon proved fairly unsatisfactory. It was burdensome for universities to try and manage what became very large private debt portfolios. Plus the system had the inherent unfairness of relying on the level of parental commitment to their offspring’s education in real monetary terms. Less well off students were bound to be disadvantaged.

2006 – 2012

The system above lasted until 2006 following on from the Higher Education Act 2004. The new Act abolished up front tuition fees and introduced a new system of deferred variable fees backed by tuition fee loans. The new system introduced Access Agreements, administered by the Office for Fair Access (OFFA), as a requirement for accessing the loan system. The Act envisaged £3,000 being the maximum fee chargeable with the ‘freedom’ to charge less. In a very short space of time all institutions were charging the maximum fee, regardless of region, subject, or institution type.

Both the previous £1,000 fee and the £3,000 fee were subject to inflation and so did increase annually. Throughout the 2006-12 period the number of students was capped for each institution, administered by HEFCE. However, institutions annually could bid for growth in line with any criteria set by central government and administered by HEFCE.

Looking back, institutions might consider the 2006 to 2012 regime as a reasonably benign and stable period of funding. Whilst growth was controlled, there was a level of stability and predictability in the system whereby teaching grants were still large enough to be meaningful, and fees permitted to increase by inflation. The new OFFA requirements were far preferable for institutions than managing private debt, as the £3,000 fee was remitted directly to institutions by the Student Loans Company (SLC). This was a period of considerable growth in the sector as the Blair government sought to widen the scope of higher education and increase the participation rate past 50% of school leavers.

Although the ‘variable’ fee very quickly was pegged at the maximum level by all institutions, the teaching grant maintained the variable of unit of resource by price group banding.

2012 – 2015

The 2004 Act had been amended at Committee Stage to include a review of the fee system after three years of operation. This was met by the Browne Review of 2010 (Securing a sustainable future for higher education).

The Browne report was radical in its recommendations; principally proposing that the burden of funding should shift from grant funding to student fees. The rationale was that the economic beneficiaries of higher education should bear the cost of tuition rather than through Treasury revenue funding. The much higher fees proposed would be funded by a massive expansion of the deferred loan system and treated as a long term debt asset rather than annual cost.

The report in its original form proposed a free market approach to fees, not specifying a hard limit. The cashflow for central government would be controlled by student number controls and levies on fees above a set threshold.

The consideration of the report fell to the new coalition government and provided the downfall of the Liberal Democrats as one of the biggest side effects. 

The government approach rejected the principle that the ‘market’ could operate without price control, but through supply side control (the volume of students entering the system). Instead it believed that the market would operate more efficiently by a price control (maximum fee of £9,000) and the eventual abolition of student number controls (2015). The belief was that institutions would charge different fees according to demand. And that quality could play a factor in that. 

Of course, the system played out very differently in practice. There was a very quick race to the top in terms of charging the maximum fee of £9,000, regardless of subject price band, region, or institution type. In effect the fee became ‘fixed’ creating a system that eroded the original system of subject price bands, and funding for teaching being related to costs on the input side. It was perhaps surprising that both Ministers involved, Vince Cable and David Willets, believed that only in “exceptional circumstances” would HEIs charge fees at the upper limit. The lessons from the £3,000 upper limit were seemingly ignored. The economics would suggest that where there is a price cap, and where demand would be sufficient, institutions would move to that upper limit without hesitation. Perhaps the only way fees might have remained variable would have been if the original recommendations of the Browne report had been implemented despite the risks.

The block grant was cut by 40% to offset the change to the £9,000 fee. Only a remnant of the original grant by price banding remained, with only bands A and B retaining meaningful grant funding. 

The system initially created a short period of a financial dividend in the sector by materially uplifting the financial resources earned for classroom-based subjects. This allowed institutions to effectively cross subsidise other activities from the much higher level of contribution from subjects in bands D and C. Adding to this was the start of a sustained period of growth in unregulated fees from overseas students leading to resources within the sector expanding rapidly. 

The highest surplus in the sector was achieved in 2015/16 at 4.9% overall. The current position, in contrast, is that the ‘real-terms value’ of income for teaching UK students (tuition fee plus teaching grant from UK public funding, per UK student) is approximately 25% lower than it was in 2015-16.

Further reforms post 2015 

A material change came in 2015 with the removal of student number controls. This followed the political will to create a ‘market’ in higher education. Further to this the 2017 Higher Education and Research Act created a single register of HE providers bringing Alternative Providers directly into the system and enabling them to access the drawdown of student loans up to the fee cap.

The introduction of the Teaching Excellence Framework (TEF) in 2016 initially provided the opportunity for fees to start to rise by a factor of inflation for institutions reaching Bronze and above. However, in 2017/18 there was the only change to the £9,000 since its introduction which was the cap increasing to £9,250 in England. Unexpectedly the Prime Minister, Teresa May, announced at the Conservative Party Conference in October 2017 that the fee cap would remain frozen at £9,250. This effectively decoupled the TEF from any conditionality around fee increases.

The fee cap freeze was perhaps in response to the political climate at the time whereby some politicians and the media worked in tandem to question the value for money of the tuition fee at £9,000. Indeed, the 2015 general election included the manifesto pledge from Labour to abolish university tuition fees. In September 2017 it was suggested in various articles that the Chancellor, Philip Hammond, was actively considering reducing fees to £7,500. 

The Augar Report, commissioned by Teresa May government, further compounded the view that English fees were amongst the most expensive in the developed world, leading the recommendation that the level of resource be further frozen until at least 2022/23.

In part three this week we explore some of the possible options for the next government, as they grapple with a problem that can no longer be ignored without both real damage to the sector and much wider collateral economic, cultural and social damage.