Part three – the funding options
In the final blog in our series on Sustainability in HE Funding by GuildHE’s Chief Finance Officer Mark Taylor, we consider which of five options could ‘future-proof’ the system and best maintain subject diversity, choice and specialisms.
With the possibility of universities failing making it to number four of Sue Gray’s crisis list for an incoming Labour government, the state of higher education funding has finally entered the front-line political consciousness. It’s about time; the sharp rise in inflation in 2022-23 has created a perfect storm for many institutions that may not have been anticipated when the issue of fees and funding appeared less urgent.
There are broadly seven parameters in HE funding:
- The fee level (the amount of money that the student notionally is responsible for)
- The teaching grant (currently largely supporting OfS definitions of High Cost and Strategically Important Subjects and some students)
- The student maintenance loan/grant
- The interest rate on loans
- The repayment threshold on loans post graduation
- The maximum period of the loan before write off
- Home student number intakes
The balance of 4-6 determines The Resource Accounting and Budgeting (RAB) charge which is the estimated cost to the government of borrowing to support the student finance system. It is based on future loan write-offs and interest subsidies in net present value terms. Small changes can have substantial impacts and it is in this area that the flexibility exists in accounting for any fee or grant rises, given that a net rise in revenue funding support for HE would otherwise be competing with the likely higher political priorities of the NHS, Policing, Housing, Defence Spending, and Schools etc.
Five options are considered below, each with their political risks, and risks to the sector.
1: No change to the current fee cap and grants
This has to be considered, not least because in Scotland and Northern Ireland universities receive less and an incoming government in Westminster might think this is a problem that could wait a little longer. From the sector’s point of view this is clearly untenable longer term. There would likely be a reluctance by any government to raise the fee cap above £10,000.
The issue would be how quickly the system, or at least sections of it, would enter a real existential crisis with the prospect of insolvencies..
It would be unlikely that the government could rely on consolidations to mitigate the effect of this, as solvent institutions would be reluctant to take on the inherent risks of destabilisation in merging with financially weak or insolvent institutions (or at least without very substantial merger support funding to write off debts and cover restructuring costs). Unlike HEFCE, the OfS has no real remit to intervene in the sector to fund or support mergers.
The political consequences of high profile failures would undermine confidence in UK higher education, push future price of commercial debt funding up very sharply, and weaken demand from overseas students, one of the sector’s biggest economic success stories.
2: Increase the fee cap
This is one of the simpler options, but also one of hardest to sell politically. To meaningfully redress the current shortfall in value could mean a new fee cap of at least £11,750. The real problem, aside from the hard sell needed to persuade the electorate of the need for such a rise, would be how to make such a settlement sustainable. If the fee cap were raised, and then frozen again, the value would erode once more, requiring another ‘fix’ at a future point.
A blanket fee cap rise would be very unlikely to lead to any differentiation in fees across providers, and would once more provide a disproportionate benefit to classroom subjects (Band D) versus higher cost areas.
However, as an option, were fees raised to an initial new threshold, recognising the 25% fall in value since 2015, and then allowed to rise by a measure of inflation every year thereafter, this could be one version of a sustainable home student funding system for HEIs.
3: Teaching grant only addition
London Economics has modelled a £1,000 increase in teaching grants per student, funded by a 1% increase in the loan interest rate.
There are several difficulties with this. As in 2 above, how would funding be put on a longer term sustainable basis without the need for future ‘fixes’? Whilst £1,000 per student might be welcomed, it would only redress the funding shortfall on Band D. Bands C and above would remain in deficit.
It would seem unlikely that this option would be politically acceptable. More likely, would be to focus any increase on ‘Higher Cost and Strategically Important’ subjects. It will be fairly irresistible for government to retain control on what they deem to be strategically important to fund. The recent direction of travel from DfE has been increasingly directive with regards to grant funding.
4: Employers levy
UCU recently commissioned London Economics to cost the removal of tuition fees, and replacement with teaching grants only (akin to the pre-1998 funding system).
The findings are that such a move could be funded by a 1.13% levy on employers or a 3% increase in corporation tax. Either way, this would constitute a rise in taxation on employers.
One cannot help feeling that the work here is around eight years too late. Perhaps such a reasoned proposal would have helped Labour in 2015 better explain how to fund higher education without fees.
It would certainly seem very unlikely that this proposal would come back into the current Labour Party’s manifesto. And it would certainly be politically unacceptable to any Conservative administration. However, it does debunk any notion that a return to no fees would be impossible.
5: Restructure fees and grants
Since 2012 essentially ‘price’ has been disconnected from cost, initially creating inherent incentives for cross subsidisation. A further period of disconnecting price from cost could risk further distorting the market and diversity of provision.
The alternative approach would be to look at the cost side of higher education, and create a more sustainable system based on cost+. There is a very valid premise for this in that the TRAC system was brought into the sector to put research funding on a more sustainable footing by using cost as the primary basis for understanding price and moving towards sustainable economic recovery of expenditure.
The starting point could be the existing HESA Subject Price Groups. The OFS Financial Return provides a good basis for data on cost by subject group across the sector. There are then broadly two options. First, the system could change from the single fee cap to variable fees set relative to cost norms. For example, the fee for Band D could remain at present at less than £10,000, with Band C at £11,500, Band B at £13,500. Grant funding could arguably then be restricted to Band A to maintain a fee at, say, £15,000. As Band A student numbers are controlled centrally anyway, the risk to Treasury would be contained.
Fees could be increased relative to factors around cost rather than using a blunt measure such as CPI. Complex issues would remain however, such as how to maintain access and participation across higher price subjects (graduate earnings are not necessarily related to cost, for example).
Secondly, fees could be held at current levels (or cut, as the Augar review proposed) with extra grant funding going to subjects on the basis of cost as well as government’s strategic priorities. The advantages of a more nuanced system based on cost would be to remove cross subsidies and give the government more levers to shape the outputs of the higher education system. There would be questions about how to incentivise efficiency when price was set relative to cost. But the data source from HESA is reasonably rich and would allow for a good analysis of efficiency, norms and trends.
Maintenance costs
This is currently an issue of growing urgency. A landmark HEPI and TechnologyOne report shows, for the first time, how much students need in order to have a minimum acceptable standard of living. Adjusting in line with rent prices in different parts of the UK, it is estimated that students need £18,632 a year outside London and £21,774 a year in London to reach Minimum Income Standard (MIS).
There is growing evidence that demand from home applicants to higher education is starting to falter and that this could be related to the growing gap between Maintenance Loans and actual costs. The OfS writes “Continued increases in the cost of living are having an impact on many higher education students. These issues are likely to have a bearing on the decisions prospective students make about whether and when to enter higher education, or on the ability of existing students to progress through their course to completion. Recent downward trends in applicants to higher education providers are likely to be largely related to concerns about the cost of living.”
The choices for government are difficult in this area. Increasing maintenance loans or restoring grants to bridge the current funding gap would be expensive without any student number controls.
Alternatives could be to more proactively look at the diversity of the modes of study, building on LLE, Higher Apprenticeships and other forms of skills training.
Conclusions
The funding of higher education is undoubtedly between a rock and a hard place. But the status quo is clearly barely sustainable past the next election. Increasing funding against competing priorities when government finances are in such a very poor state is fairly unrealistic as an expectation.
It is likely therefore that creating a more sustainable funding system will require further changes to the student loan regime, and possibly consideration of replacing the current apprenticeship levy with a broader skills levy covering all of tertiary education.
One off ‘fixes’ should be argued against as they would quickly be eroded, leading to further risks within the sector to both quality, specialism and diversity.
The most sustainable route would be to reconnect the level of resource to reasonable and robustly tested measures of cost. This could provide the best way to maintain subject diversity, choice and specialisms within the sector, and have a differentiated fee and/or funding structure that future proofs the system.