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High risk funding plan for English universities will create ‘great divide’

It is no surprise to higher education insiders that David Willetts, the former Universities Minister in London, has revealed that he was exploring a scheme in which universities would be asked to shoulder responsibility for some of the loans of their students in return for permission to raise tuition fees, writes Pam Tatlow.

The higher education reforms in England which saw fees rise to £9000 per annum (around Euro 11,400) in 2012 have been based on ‘smoke and mirrors’ accountancy designed to reduce the structural deficit by reducing the budget of the Department for Business, Innovation and Skills. The fact that taxpayers will have to write off significantly more student debt in the long-term and that the Government has borrowed more to fund the 2012 system have not been themes upon which Ministers have chosen to dwell.

However imaginative the plan being hatched, the political risks of its introduction would be high. Over 2 million students study for higher education qualifications in the UK each year with a third entering university for the first time when they are over 21. The overwhelming majority of these students do not study at universities which are likely to be favoured by City banks willing to provide equity and take a punt on student loans which they expect to be repaid in double quick time.

Before he left office, Willetts advised members of parliament that that the Resource and Accounting Budget or RAB charge arising from the 2012 fees regime was likely to be 40% – an outcome which analysts in London Economics and million+ predicted four years ago but which was 10% higher than the estimates given to MPs prior to the 2010 House of Commons vote on raising the fee cap.

The Public Accounts and Business Innovation and Skills (BIS) Select Committees have been scathing about the flawed prediction models used by BIS but the fact remains that for every £100 issued in student loans under the 2012 system, £40 will be written-off by the taxpayer. The increase in fees also means that the loan book will itself double in size to £9bn by 2015 making the scale of the write–off even more significant.

This is not good news for taxpayers or graduates. Men who graduate under the 2012 system will on average repay loans for 11 years longer than under the previous system. Meanwhile the majority of women graduates will never repay their loans in full as the application of a real interest rate, the gender pay divide and their more flexible working lives combine to increase the debt owed. For their part, universities are likely to face further reductions in their already much depleted teaching grant but unlike under the pre-2012 funding regime, they have not been permitted to increase the annual tuition fee by inflation.

George Osborne’s surprise announcement in the December Autumn Statement that restrictions on the number of students that universities can recruit, will be abolished completely in 2015, has added to the funding conundrum. It is common knowledge that this deregulation of numbers caught BIS officials and Ministers off-guard and they have been hard put to explain how the expansion will be funded.

The Treasury predicted that £2bn of student loans would be sold by 2020. Most experts believe that the Government will be lucky to sell £200m of loans in the next five years and any that are sold are likely to be heavily discounted to take account of the eye-watering RAB charge. To add fuel to the fire, Vince Cable, the BIS Secretary of State, announced to a meeting of Liberal-Democrat activists that the sale of the student loan book would be put on hold.

With the economic and financial pressures of the 2012 higher education reforms mounting, all political parties now have an obligation to set out before the  2015 general election how they will fund universities and support students in the future but it is little wonder that both ex and current Ministers are looking around for solutions.

The deal that Willetts was contemplating would call into question the Conservatives’ commitments to social justice and social mobility and would undoubtedly be divisive. If universities have to bear some of the costs and the risks of the RAB charge associated with an increase in fees, it does not take a genius to work out the universities which are likely to be part of the game bearing in mind the striking differences in institutional recruitment practices and student profiles in the UK.

A small number of universities continue to recruit significantly more students from independent schools. Overall, the students of these universities come from more socially exclusive backgrounds, are more likely to study full-time and enter university when they are younger. As graduates they are also much more likely to have the family connections and the social, cultural, and financial capital to help them step onto the employment ladder and do well in the jobs market early in their careers. This trajectory is aided and abetted by some of the top city firms whose recruitment milk-round never reaches beyond these same universities. For all of these reasons, the graduates of a small number of universities are likely to be a much better bet in terms of loan repayments (assuming of course that they needed to take loans out in the first place).

Contrast that with the student profiles of universities which contribute much more to social mobility and admit students from a wide range of backgrounds and ages, more of whom are ‘first in family’ to study at university. These universities would be much less able (even if their Boards were willing) to take on responsibility for part of the debts of their students. If responsibility for the latter were then linked with the right to increase fees, any prospect of equity of resource would go out of the window and a two tier system would inevitably emerge.

Whatever the challenges of creating a sustainable system in the future, Greg Clark, the new Universities Minister and the Conservatives more generally, would be wise to exercise some caution over the Willetts ‘plan’ which he has been quoted as saying would allow Oxford to charge fees of £16,000 per year.  The creation of a great divide in universities and their funding, courtesy of city investors, may not prove as popular with the majority of students and their families as ex-Ministers think.  Nor is it likely to provide the sustainable funding system that students and taxpayers deserve.

Pam Tatlow is Chief Executive of the university think-tank million+

Comments
  1. The poorly recruiting universities represented by the author’s organisation claim they contribute to social mobility. However if that were really true their graduates would be securing well paid jobs and there would be no problem with repaying student loans.

    From what the author has written there is a problem with jobs and loan repayment so the claims about social mobility seem highly dubious. .

    Comment by A Londoner on August 6, 2014 at 4:45 pm
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