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Higher Education FundingGill Wyness
Institute for Fiscal Studies
December 2010
© Institute for Fiscal Studies
Outline
• Reasons for state intervention in higher education
• Overview of higher education funding policy
• Current higher education system
• Analysis of higher education reforms
– financial impact of reforms on students, graduates, the taxpayer and universities
• Potential implications for access to higher education
Reasons for state intervention in HE
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Why might the market alone lead to inefficient outcomes?
1. Credit market failure
2. Risk and uncertainty
3. Externalities
4. Information problems
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1. Credit market failure
• HE requires cash for fees and living expenses
• With perfect credit markets, borrow now and repay from future income
• But credit markets are not perfect due to information asymmetry, risk and uncertainty
• Lack of collateral to secure debt against
• Asymmetric information: borrower has more information than lender
• Lender exposed to adverse selection / moral hazard
• Higher interest rates or credit rationing
• Inefficiently small amount of borrowing and investment
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2. Risk and uncertainty
• Student may be reluctant to borrow
– Debt aversion
– Perceived risk of failing the degree
– Uncertain returns to a degree: positive on average but high variance
– Might need high risk premium to make the investment worthwhile
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3. Externalities
• Education may create benefits to society over and above those that accrue to the individual
– Total return to education = private return + social return
• Average private return to HE vs. non-HE is roughly 25–27% for women, 18–21% for men (OECD)
• Social returns much more difficult to quantify
• Do individuals incorporate social return to education in weighing up costs and benefits?
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4. Information problems
• To make rational decisions, individuals must be perfectly informed about
– Nature of product (e.g. university quality, HE experience)
– Prices (e.g. fees, living costs, foregone earnings)
– Future (e.g. earnings, debt repayments)
• Imperfect information may lead to under-consumption
– Particularly among lower socio-economic groups
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Efficiency
• All of these arguments can justify state interventions and subsidies on efficiency grounds
– But do not justify full subsidy given large private returns to HE
Past and current HE funding policy
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UK higher education finance policy
© Institute for Fiscal Studies
Source: HESA
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
1990/91: First student
loans / maintenance
grants frozen
1992 HE Act: 44 "new"
Universities in England
1998/99:
Up-front tuition fees,
means tested, max
£1200
Grants reduced,
abolished in 1999
Loans increased
2006/07:
Deferred top-up fees of £3000
introduced in England & NI
Grants increased
1970s: Post-
Robbins Expansion
of HE Sector
2000/01 – 2001/02:
Fees abolished in
Scotland, grants up to
£2000 restored for
poorest students
2009/10: Browne
review: +
BIS Response
2012/13 fee
cap raised
to £9k
Current system: costs to students, the taxpayer and graduates
© Institute for Fiscal Studies
Current system (academic year 2010/11)
1. Fees
– £3,290 per year, deferred
2. Support
– Maintenance loan – max £4,950, deferred
– Maintenance grant – max £2,906 (parental income<£25k)
– Bursaries
3. Repayment
‒ Repayment at 9% of earnings above £15,000
‒ Zero real interest rate
‒ 25 year write-off period
Under the current system of upfront support, maintenance loans depend on parental income
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
up
fro
nt
sup
po
rt (
£)
Parental income
bursary
grant
loan
2010/11 system
The current system: net present value of repayments
© Institute for Fiscal Studies
0
2000
4000
6000
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12000
14000
16000
18000
20000
0 10 20 30 40 50 60 70 80 90
NP
V r
ep
ay
me
nts
(£
)
Percentile of the graduate lifetime earnings distribution
male
female
all
Average loan per student: £21,300
Average repayment per student: £15,620
Repayment as % of loan issued: 73%
0
2000
4000
6000
8000
10000
12000
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16000
18000
20000
0 10 20 30 40 50 60 70 80 90
Su
bsi
dy
(£
)
Percentile of the graduate lifetime earnings distribution
male
female
all
The current system: Government subsidy
© Institute for Fiscal Studies
Average loan issued per student: £21,300
Average repayment per student: £15,620
Average subsidy per student: £5,690
Repayment as % of loan: 73%
Subsidy as % loan: 27%
The Browne Review (The Independent Review of Higher Education Funding and Student Finance)
Lord Browne asked to examine 3 issues:
• widening university participation
• affordability of higher education for students and the taxpayer
• how to simplify the current system of support
• Given the current economic circumstances: how to ensure the financial sustainability of the system
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The Browne Review recommendations
1. Fees
• Remove the fee cap, but universities must compensate the
government for cost of non-repayment
2. Support
• Universal maintenance loan
3. Repayment
• 2.2% interest rate
• Increase repayment threshold to £21k
• Lengthen write-off period to 30 years
© Institute for Fiscal Studies
The Governments’ response to the Browne Review
1. Fees
• Fee cap of £9,000
• “soft cap” of £6,000 (widening participation)
2. Support
• Means-tested maintenance loans
• Tighter maintenance grants
• Scholarship for students who qualify for free school meals
3. Repayment
• Tapered interest rates
• 0% if earn less than £21,000 3% if earn >=£41,000
• Increase repayment threshold to £21k (and uprate with earnings)
Impact of the proposed reforms
1. Students
2. Graduates
3. The Taxpayer
4. Universities
Students are better off under the new system, in terms of up-front support
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
0
25
,00
0
27
,50
0
30
,00
0
32
,50
0
35
,00
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37
,50
0
40
,00
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,50
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,00
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,50
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,50
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,00
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,50
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65
,00
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67
,50
0
70
,00
0
up
fro
nt
sup
po
rt (
£)
Parental income
bursary
grant
loan
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
0
25
,00
0
27
,50
0
30
,00
0
32
,50
0
35
,00
0
37
,50
0
40
,00
0
42
,50
0
45
,00
0
47
,50
0
50
,00
0
52
,50
0
55
,00
0
57
,50
0
60
,00
0
62
,50
0
65
,00
0
67
,50
0
70
,00
0
up
fro
nt
sup
po
rt (
£)
Parental income
grant
loan
2010/11 system Proposed system
Graduates: 78% are worse off, though the system is progressive
0
5000
10000
15000
20000
25000
30000
35000
40000
0 10 20 30 40 50 60 70 80 90
NP
V r
ep
ay
me
nts
(£
)
Percentile of the graduate lifetime earnings distribution
current system
new system
System: 2010/11 proposed
Average loan per student: £21,300 £34,800
Average repayment per student: £15,620 £25,020
Repayment as % of loan: 73% 72%
Assumes average fee of £7,500 per year
The cost to the taxpayer has increased
-5000
0
5000
10000
15000
20000
25000
30000
35000
0 10 20 30 40 50 60 70 80 90
sub
sid
y (
£)
Percentile of the graduate lifetime earnings distribution
current system
new system
System: 2010/11 proposed
Average loan per student: £21,300 £34,800
Average subsidy per student: £5,690 £9,800
Subsidy as % of loan: 27% 28%
Assumes average fee of £7,500 per year
Public funding has been cut, but universities have access to more private finance
£12,320
£2,430
£3,420
£7,680
£6,350
£14,240
current system proposed system
Sources of university funding
bursary
private fee contribution
taxpayer fee contribution
hefce
Assumes average fee of £7,500 per year
Balance of contributions to higher education
Current systemProposed (7.5k fee)
change
taxpayer -£22,290 -£16,750 +£5,540
graduates -£15,620 -£25,020 -£9,400
universities +£21,780 +£24,340 +£2,570
students +£16,130 +£17,420 +£1,290
This table shows that the new system (with a £7.5k fee) will:
• save the taxpayer £5,540 per student (from reductions in HEFCE grant, net of increased fee
and loan subsidy)
• cost graduates £9,400 per student (from increased fee and maintenance loan repayments)
• benefit universities by £2,570 per student (from additional fee income net of reduced HEFCE
income and scholarships)
•benefit students by £1,290 per student (from increased grants, loans and scholarships)
Figures per student totals for a three year course
How will the increase in fees impact student participation?
Research by Dearden, Fitzsimons & Wyness (2010): estimate effects of tuition fees , loans and grants on higher education participationusing funding reforms of past 20 years
UK higher education finance system 1992 – 2007
• Variation in fees , loans and grants over time
– Upfront fees of £1200 introduced in 1998
– Deferred fees of £3000 introduced in 2006
– Student maintenance grants reduced then abolished in 1999, re-introduced in 2004 and extended in 2006
– Maintenance loans increasing every year
• Variation in fees, loans and grants by parental income level –means testing
© Institute for Fiscal Studies
•A £1000 increase in fees results in a 3.3 percentage point
fall in participation
•A £1000 increase in grants results in a 1.9 percentage point
increase in participation
•A £1000 increase in loans results in a 1.9 percentage point
increase in participation
Results of modelling – grants, loans and fees impact participation in different ways
Source: Labour Force Survey, £2006
How will the increase in fees impact student participation?
Research by Chowdry et al (2009): understand the determinants of participation in HE
• Well known that students from low-income backgrounds under-represented in university
– What impact does HE finance have on this?
• How likely are changes to student finance to encourage/discourage entry?
© Institute for Fiscal Studies
0%5%
10%15%20%25%30%35%40%45%50%
Richest 2nd 3rd 4th Poorest
% a
tte
nd
ing
HE
ag
e 1
8/1
9
Poorer students are overall less likely to go university than richer students…
… But those with comparable A Level grades to richer students are not
0.00.10.20.30.40.50.60.70.80.91.0
301+ 181-300 1-180 None% a
tte
nd
ing
HE
at
ag
e1
8/1
9
Richest 2nd 3rd 4th Poorest
25% of richest
students are here 3% of poorest
students are here
45% of richest
are here
84% of poorest
are here
Conclusions
• Many economic reasons for state intervention in HE provision
– Though high average private returns to HE
• Current system is expensive to the taxpayer
• New system transfers the cost of HE from the taxpayer to graduates themselves
• New system is progressive
– lower earning graduates pay less than high earning graduates
– Low earning graduates pay half as much as they do now, due to increase in repayment threshold
– High earning graduates pay twice as much as they do now, due to fee increase and interest rate
• Large fee increases and interest rate increases could result in falling participation
– But barriers to entry for poor students occur earlier in life
© Institute for Fiscal Studies
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