RSA Lecture – The Cost of Higher Education

January 2014

Good evening.

Thank you to Matthew for hosting the meeting, Alison for agreeing to respond, and you for coming. You may not agree with me tonight. But if I don’t challenge at least some current assumptions about how we fund and deliver higher education I shall have failed.

I want to change the terms of the debate, not present a detailed plan for university education.

What’s the problem?

But I suppose the first question is why bother? Isn’t everything going very well?

UCAS figures show the largest ever number of admissions last September, there’s further progress, in widening participation, and even a small increase in free school meal students going to the 35 most selective universities.

And the Chancellor is apparently so flush with money he can lift the cap on student numbers, funding an extra 60,000 a year.

I’m sure researchers and the UCU will say it’s no bed of roses, but cash from new fees means university life has been a lot more congenial than life in local government or the NHS for the past three years.

The private cost is eye-watering but haven’t the high fees been accepted by parents and students?

The problem, of course, is that the whole system of university finance for English students is sliding slowly but surely off a cliff.

  •  The £9000 fee is declining in real value
  • Capital spending has been slashed, pushing more universities further into debt driven investment
  •  The science budget will have fallen by 20% in real terms by 2016 – undoing the huge impact of Labour’s ten year investment
  •  The system runs so hot that a small misjudgement about student numbers creates a huge hole in the BIS budget. So we have ministers arguing about whether to cut research or support for poorer students
  •  The NAO have highlighted the black hole of unrecoverable loans, including those to EU students
  •  The cost of debt cancellation– the so-called Resource Account Budgeting or RAB charge – is rising steadily.
  •  The Chancellors new expansion – apparently based on the same accounting principles as Merdle’s Bank – has many questions about its sustainability.

Across universities you hear the same story. ‘We might get through the next few years. But it can’t go on like this for long’.

We already have the world’s most expensive public university system yet most proposals for change are variations on the theme of asking graduates to pay even more.

But that’s not the end of the bad news.

Quality and relevance

English universities have huge strengths of course. Our international research reputation is outstanding; we remain a magnet for international students; there is much excellence in our teaching.

But concerns about what parts of higher education deliver simply won’t go away. Despite improvements, many employers remain deeply critical of the employability of too many graduates. One quote is not evidence, but it’s not hard to find ones like this one:

‘Despite our best efforts we have come to the decision that we would prefer to be understaffed than hire poor-quality applicants.” Bryan Urbick, founder and CEO of the Consumer Knowledge Centre

“As the economy rebalances, we will need more highly-skilled employees, particularly for young people with science, technology, engineering and maths (STEM) degrees, but businesses are struggling to recruit good graduates from the UK.“

And

‘Strong overall performance on higher skills participation must not be allowed to mask the skills shortages already impacting upon key sectors of the economy, which point to a mismatch between supply and demand’ Katja Hall, Policy Director – CBI

47% of new graduates, and a third of those who graduated five years ago, don’t work in graduate jobs. They’re in debt and its not the reason many went to Uni in the first place.

There’s some big questions here about the links between higher education, the economy and economic growth.

Social Mobility

Despite steady progress in widening participation we are still miles away from a genuinely meritocratic, lifelong higher education system. The change in the most selective institutions has been small and there has been a sharp fall in mature student applications and a collapse in part time student numbers. These are the routes which have previously allowed talented individuals to enter higher education later in life.

Austerity

And austerity has not gone away.

£25bn of more cuts says the Chancellor. Labour may not have signed up to those sums, but every pound will be closely scrutinised.

As a country we actually spend too little on higher education. But we can’t even open the case for more until we’ve scrutinised every current pound we spend.

And that’s not just the public money.

The cohort of students who started in September 2013 will pay back £7.8bn over the years ahead. You can’t ask people to pay sums like this if you can’t prove it will be well spent.

Getting more from current spending is not alternative to higher investment. It’s the essential precursor to it.

My aim tonight

I will argue that of the £bns taxpayers spend on higher education, hardly anything is spent directly on teaching students.

I’m going to ask a radical question – what would universities look like if the state actually spent all it could on teaching students things.

I will argue that we have foolishly turned our backs on modes of higher education which, for the right students, would be more cost-effective and better tailored to the economy’s needs, and do more for real social mobility.

I’ll ask what a more cost effective university system would look like.

I will argue that the £bns that graduates will pay are inflated by all sorts of costs which are not their responsibility, the system lacks transparency and which, despite all the talk of choice, is actually narrowing many of the options students used to enjoy.

I’ll ask what a fairer, more diverse university system might look like.

And finally, I will argue that current spending does far too little to foster the real partnerships with employers that would benefit students, business and the wider economy.

I’ll ask how we could use taxpayers more effectively to boost recovery and growth.

Taken together, I’ll show how these changes will widen student choice, reduce the costs of higher education and improve social mobility

I want to change the terms of the debate, not present a detailed plan for university education.

The independent policy maker faces many obstacles.

BIS doesn’t allow independent access to their HE finance model so we have to rely on their crude ‘ready reckoner’ published some time ago. An updated version promised before Christmas arrived on Tuesday – too late for today. We have, for example, had to assume a RAB charge of 35%, not the 40% which now seems likely.

I have drawn heavily on the incomparable Paul Bolton in the House of Commons Library. But I’ve asked Paul to make so many heroic assumptions and approximations that the responsibility for using the figures is mine, not his.

Higher Education finance

Let’s take a quick look at the public finance of higher education

On the government’s figures, by 2015-16 (and ignoring for now the sketchy announcement in the Autumn Statement):

  •  Of the £6.7bn of tax funded spending, just £700m will be spent directly on teaching grant
  •  Of the rest £4.2bn is spent on debt cancellation (RAB charges)
  •  £330m goes on supporting more disadvantaged students to successfully complete their courses, and £1.5bn goes on maintenance grants to low income students.

Taxpayers now spend £6 on debt cancellation for every £1 they spend on teaching students anything.

Defenders of the current system will say I just don’t understand the system.

Its fees that pay for teaching costs, they say. And that’s made possible by RAB charges which are a progressive policy which protects graduates from degrees which turn out to be of limited economic value.

The reality of course is that RAB charges are not so much a progressive policy as a simple recognition of the political reality that you can’t get blood out of a stone.

According to David Willetts, perhaps 50% of this September’s students will not repay their loans in full.

Half of all today’s students will pay 9% of all their income above the repayment threshold for the next 30 years and they still won’t clear their debts. And that takes no account of bank loans, credit cards and any other debts that mount up while studying

We do have to hope that the mind-broadening, growing up, parts of their degree are worth it, because economically it hardly looks a good deal for them, taxpayers or the wider society.

The RAB charge was 28% under Labour’s fee system, a projected 32% when the new system was introduced, now ministers say it is 40% and many independent experts say it will be higher.

It’s not just that rising RAB charges are a problem for the government and the public finances.

Debt write off also forces up everyone’s fees by top-slicing money which could have been spent on teaching, so keeping fees down.

So it’s equally true to say that every time the RAB charge goes up it means fewer and fewer successful graduates paying off the debts of more and more economically less successful graduates.

Or to put it another way,’ if your son didn’t go to that unsuitable course at that weak university, my daughter could pay lower fees for her degree at her more prestigious college.’

That may not be an issue in English politics today, but it will be.

Ever rising fees will lead more and more students and parents to ask what and who they are paying for.

I don’t know of any progressive principle which thinks it is a good idea to induce people, generally from lower income backgrounds, to take on huge loans, demand big payments, and then to tell them they don’t have to pay after all. It’s not how progressive parents bring up our children, and the state shouldn’t do it to them either.

Of course, some people will die, fall ill, devote themselves to their children or do what I did and spend 18 years after graduation working in low paid jobs in the voluntary sector.

But a sound, progressive, politically sustainable system would have loans sufficiently affordable that the great majority pay them in full. If we want wealthy graduates to pay more we should tax them fairly.

The economic and political costs of a high fees policy

If you look at HE funding again, something else may stand out.

Look at how many elements were the consequence of introducing a high fee market system. They are either economically unavoidable, or politicians had to introduce them to allay public concerns about high fees.

A high cost of debt cancellation is simply unavoidable, but the repayment threshold also reflects a political calculation.

The £150m a year National Scholarship Programme which flared and died in just three years was otherwise known as the Save Nick Clegg’s Face fund.

In one of the largest politically driven programmes, the Office of Fair Access requires universities charging more than £6000 to plough around £700m of their fee income into bursaries, fee remission and the like of little proven benefit. The cost-effective AimHigher scheme was scrapped by the coalition

The maintenance grant was increased by Labour and again by the Coalition to offset criticism of fees – even though there is little logical connection between the two.

Received wisdom is that this spending is politically untouchable.

But we must dare to think differently. Crude politics has created too many bad policies in the past.

Let’s start by taking the radical step of putting all this money into teaching. And then, put back, working from first principles, the programmes that are really needed.

Positive feedback

As you put more money into teaching the cost of fees comes down. As fees fall, RAB charges fall, and the % of debt repaid increases. So you plough these RAB savings back into teaching, fees fall, RAB charges come down, you put the money into teaching and so on. The effect is striking.

In our model, which also builds in some other changes I’m going to outline, spending on teaching rises from £700m to £4800m – a seven- fold increase. The spending on debt cancellation falls from £4,200m to £2,200m. In other words we have transferred £2bn from debt cancellation into the education of students!

My first aim was to see what happens if we put all public funding into teaching. It turns out it would nearly halve current fees.

But I’ve explored other changes which, though they contribute to reducing the cost of fees further, are really there because they are inherently desirable.

In my view our university system would be stronger if it offered more choice to students who cannot or do not want to spend three years full time studying for a degree; if it gave students more choices of ways to reduce their living costs; if it made it easier for employers to partner universities in the delivery of degrees; and if it freed up other resources for re-investment.

Cutting fees and debt repayments will ease the burden on graduates. The more immediate problem for most students is surviving while they study.

Recent NUS research shows a £7000 shortfall per year between student living costs and the maximum income from grants and maintenance loans.

I don’t want to sound like a party hack but the term ‘cost of living crisis’ comes to mind here.

There’s just no prospect of finding the sort of public money which could make a significant impact on student incomes. The only way is to give students more choice of less expensive modes of study, whether

studying more intensively for a less time, mixing part-time and full time education, combining work and study, or studying from home.

Yet we seem to be going in the opposite direction.

A one size fits all university system?

Even the most fervent advocates of Labour’s 50% target would surely be surprised that it has been achieved almost entirely through the most expensive mode of higher education – the three year degree studied away from home.

Part time education is collapsing. The number of two year honours degrees has barely changed. Labour’s employer backed degrees have been dropped. Fewer mature students are applying.

Higher education is becoming ever more a one size fits all approach.

It is almost a rite of passage for young people, defended as much for the so-called ‘student experience’ as the quality of education.

I wouldn’t knock it; I enjoyed it myself.

But should our universities be so focussed on this single mode of study?

No one suggests that Open University graduates do not have real degrees, even though they – by definition – eschew the entire ‘student experience’.

There is second reason for challenging our ever growing reliance on the three year degree study away from home.

Of all the OECD countries, the UK has the highest percentage of young graduates. And this was before the fall in mature and part time student applications. Today, 90% of full time English students at university are under 25.

More than anywhere else in the OECD we have made higher education a one-shot deal, for young people to do as early as possible.

What on earth have we done?

Our schools system fails more than most in overcoming inequality and social disadvantage by the age of 18 or 19. Yet on top of this inequitable schools system we have imposed the youngest HE system in the world.

It is is impossible for all young people to compete fairly in such a system.

Now, I don’t think we should give up trying to get the Russell Group to take admissions seriously. We should support Alan Milburn’s efforts to open up the professions. We should challenge the abuse of interns.

But for the foreseeable future, a genuine commitment to social mobility will require the construction of routes for the late developers, those who went to weak schools and those whose parents had low aspirations.

So as part of my thought experiment I’ve looked at the role of more intensive degrees, studying from home and combining work and study.

Two year degrees

Two year degrees exist in both the public and private sector.

The private University of Buckingham repeatedly tops the National Student Survey for student satisfaction.

We can’t know the real demand for two year courses – current financial rules make it hard for public universities to introduce them. Research for Kaplan, albeit an interested party, suggests an untapped market and good awareness of the pros and cons of intensive study.

It certainly looks as though some students could study more intensively.

David Willetts says that students study 5 hours a week less than in the 1960s. On average, students study for 30 hours a week for 30 weeks of the year.

The Higher Education Policy Institute and Which study highlighted variations between similar courses in different institutions.

And according to HEPI, EU students on the Erasmus programme find our courses less intensive than in other European countries.

I have suggested that 30% of courses – half of them employer co-sponsored – should be taught intensively.

Suggestions of two year degrees always bring out fears of dumbing down. But given their potential to save money both for students and the taxpayer, knee jerk responses are irresponsible unless soundly evidence based.

In my model I’ve assumed a two year intensive degree – say 39 weeks of study a year– would cost 20% less to deliver than a three year degree. This is based on both public and private sector charges.

But I’ve also set out to graduate the same number of students – three two year cohorts every six years rather than two three year cohorts if you like.

So at any one time, teaching costs are about 7% less than at present, and there are 10% fewer students in the system.

But I’ve also designed the system so that overall university income remains unchanged.

So we have fewer students at any one time, lower costs, and the same resources. Better student-staff ratios. Less pressure on facilities. New options for research time and staff sabbaticals

There is no reason at all why standards should fall.

The key thing here is the use of intensive periods of study.

Someone in work could work four intensive half years over a four year period. Someone else might do a couple of part-time years at a local college followed by an intensive full year at another university.

Intensive study may not be for everyone. It will require commitment and a maturity of approach. In fact, perfect for the somewhat older student with work experience who needs a route into higher education but neither wants nor can afford a leisurely three year degree.

‘Studying from home’

In our model, the public finance effect of more students studying from home is relatively small and not enough to justify taking choice away.

My real motive in raising this issue is to challenge the lazy assumption that it does not matter if vast numbers of students have to leave home to study a suitable course. If anything, the current competitive regime has forced more universities to trawl a national market, not their more local communities.

The effect is to impose quite avoidable costs on students which inevitably hit the poorest hardest. A new social divide is opening between those students who can only afford to study from home and those whose family gives them the choice to study away.

We should give students a real choice to study from home because it is much cheaper and is the only realistic way of bridging the gap between the maintenance system and the real costs of studying.

I’ve assumed that 60% of students might choose to study from home if they could.

We can’t make students study from home. Many couldn’t for personal or geographical reasons.

But we are a densely populated largely urban society with many universities; there is a network of FE/HE colleges already delivering respected degrees; it should be possible to offer the vast majority of students a real, quality, choice of courses within reach of their own homes.

It is a scandal that, too often, that choice does not exist and universities in the same locality barely talk to each other.

I’ve no illusions about how challenging this is.

On the one hand, it would be big cultural shift in the way many young people and their parents see university education.

On the other, it would be an even bigger cultural challenge to universities.

It would actually mean – heaven forbid –suggesting that they sit down together at local or sub-regional level; Russell Group members and Million+; Alliance and GuildHE, to actually cooperate and collaborate on the delivery of courses. Real flexibility of study would enable students to study mutually recognised credits at universities within their locality.

Some may think this is where my thought experiment breaks down completely!

But shouldn’t we challenge universities to change their insular attitudes?

Employer sponsored degrees

Finally let’s look at the end product of all this.

Of course, university education is not all about getting a job; etc; etc.

But, you know, for many students the idea of getting a decent job is probably in there somewhere.

The ONS figures tell us that nearly 50% of new graduates, and a third of those who graduated five years ago, don’t work in graduate jobs. Things have got steadily worse during the recession, but they were not great before the banking crisis.

The figures don’t prove we are educating too many graduates. They do show that producing more graduates doesn’t automatically increase the demand for graduates – the drivers for that lie in research, development, innovation and the incentives for long term business investment.

But they probably also tell us that employers are not wrong when they say many graduates lack the employability which would make employers to want them in graduate jobs.

“One way to address this is to develop more partnership-based provision, with greater levels of business involvement in colleges and universities, as well as boosting apprenticeships. But the market in ‘learn-while-you-earn’ models – such as higher apprenticeships and more flexible degree programmes like part-time study – is underdeveloped.”

CBI Tomorrow’s growth: New routes to higher skills (2013)

So my final proposal is to subsidise employers to put their employees – current employees or potential students they recruit – through university. I’ve aimed for 50,000 a year – that’s half the total number of intensive two year degrees.

I would base this on the workforce development programme I introduced at DIUS which after just three years was creating 20,000 places a year with employers paying wages and an average of £3000 towards the course costs. I’m not proposing a rigid system. We already have some companies, like JLR at Warwick who pay the full fee costs. Others could not pay much at all. It’s the principle that matters.

Employers and universities would work together to design the right course. Big companies can do it for themselves. Smaller companies will need to work together, but that may be a real strength if employers, perhaps under the umbrella of the Local Economic Partnerships, come together to shape provision in local universities.

Bringing it together

I have looked at four changes.

  • We put as much money as possible into teaching.
  •  We use public and private contributions more effectively by encouraging more intensively taught degrees
  • We ensure that more students can minimise the cost of study by providing a genuine choice of quality courses within reach of home, and that there are more routes for older students
  •  And we incentivise new collaboration between employers and universities.

A brief financial overview

It may be helpful to run back over the key changes this makes to HE finance

These tables will repay a longer look when I publish this lecture, but they’ll give some idea of what is going on.

The approximate financial impact shows how we have switched resources into teaching and away from RAB charges. By putting money from widening participation and maintenance grants into teaching, and by shortening courses, with more students studying at home, and employer backed courses, we make an initial savings of £2.3bn. The second and third round impact on RAB charges releases an additional £1.2bn.

The next slide shows that we have kept public sector spending on higher education constant – at £6.730bn.

And the next slide on institutional steady state income shows that the total university income also remains constant – allowing for rounding errors – at £9.430bn.

Institutional income remains the same even though we have more students on cost-effective intensive courses and fewer students in the system at any one time. That’s why, as I mentioned earlier, student-staff ratios improve and there are resources to invest in teaching quality.

Not shown almost £700m OFFA tells universities to spend on widening participation. With fees slashed, the case for such central dictation falls away. If you end this requirement, the money available to universities rises to £10.1bn.

We shouldn’t overstate the case.

One of the quirks of my model is that, while graduate numbers remain constant in the first few years, overtime they would decline.

Clearly, we don’t want this to happen. The first call for more investment would be on the spare capacity built into our model and the second on the current OFFA spending. The next model will address this but here is more than enough money in the system to deal with it.

Investment in widening participation by the most selective universities remains essential. But even so, I believe substantial sums could be freed up for research.

The model has considerable flexibility.

If you feel I have pushed for too many intensive courses, aimed for too many home students, been over optimistic about employer contributions, or the student

Estimated institutional steady state income directly connected to full time English undergraduates: higher loans fully replace grants for low income students, and 15% premium

premium is too low, then we can draw on these funds to adjust the system or make relatively modest changes to the level of the student entitlement and fees.

I’ve pushed change as far as I can – partly to show what could be achieved, and partly because, frankly, I think it is essential to free up resources for research if we possibly can.

We could deliver this system in different ways, but I think we need a fresh start; as clear, transparent and fair as it can be. So let’s make a radical break with both the current system and that left by Labour.

The student entitlement

I suggest that every student accepted on an honours degree course attracts a flat rate student entitlement which goes to their university. Flat rate, irrespective of institution, course, length of course or current fee level charged.

So, you take the £4.7bn we have now allocated to teaching. You top slice, of course, the extra money required to support science, engineering and other high cost courses. And then you divide the rest amongst the students.

In the simplest form, this produces a student entitlement of £14,800 per student.

The fee now payable is the difference between the current cost of a degree and the value of the entitlement. It would be financed and paid back as at present.

The total fee cost of the average three year degree – and remember that in my model the great majority of degrees, 70% – would be three year degrees or longer – the average total would be less than £10,000 – about the levels fees were at when Labour left office.

And the total fee cost of a full cost university – currently £27k – would fall to about £12,000.

The total fee cost for a two year degree, would be less than £5000.

For those on employer sponsored degrees of course, there would be no fees and they would receive a wage as well.

There are many different routes through this system. But this example – a three year degree studied away from home (so the most expensive option) – show how total debt falls, total payment falls, and the % repaying in full increases.

The second example is a two year degree – but again assuming study away from home, so the most expensive choice – shows even more marked difference.

Students get a lot of choice. Money follows the student.

But it is an entitlement, not a voucher.

It is high time we set aside the childish fad which said that every public service reform had to be expressed in the banal and vacuous language of consumer capitalism.

If my proposal were adopted it would be because the people of England had decided to establish an entitlement for their children to go to university, and that’s how it should be described.

Support for low income students

Significant fee reductions come from investing in teaching, rather than the political and economic costs of a high fee system.

But some students from non-traditional backgrounds do need more support to complete their courses successfully. Students from poorer homes do have to live while they study. So we need to ensure these needs are still met.

I doubt that the OFFA mandated money has much effect. Bursaries may shift students between institutions, not get them apply in the first place. Fee remission is simply inequitable in a system of graduate repayments. Much of this money could be better spent either on teaching or on research.

The needs of students who need extra support are real as Million+ have argued. We could simply retain the current widening participation spending or student opportunity as it is now called.

But I would rather create an additional student entitlement, a student premium if you like, which would clearly make disadvantaged students financially more attractive to universities. My model builds in a 15% enhancement to the student entitlement.

My model replaces the student grant with a loan. By doing so we ensure that the low income student has just as much money to live on as at present.

While their maintenance debt will go up, their fees have fallen dramatically, and it is the total debt – fees and maintenance – which determines how much graduates have to pay back.

In all the modelling we have done, low income students will end up owing less money and paying back less money on every single mode of study and length of course. But still have as much to live on while they study.

This is such a radically different picture to the one we have today – lower fees, lower debt, lower payments, as many graduates, and new money for research and teaching – that you might be forgiven for thinking there is some sleight of hand. Mistakes aside, there isn’t.

All I have done is ask a few basic questions about using money better.

What George Osborne should have done

In the Autumn Statement George Osborne announced that he would put money from the sale of the student loans book into creating 60,000 additional student places. He says it will cost £700m a year.

There’s too little information to incorporate it into our modelling.

But all other things being equal, if George had invested £700m in this system, he could have created as many additional graduates, at lower cost, and had money left over to invest in teaching quality or research.

A few closing thoughts

I’ve packed a lot into a short lecture, so I want to allow time for Alison’s response and your questions.

But in closing, let me touch on a few other issues

Firstly, we have cut private repayments by £2.4bn without reducing university income. I wanted to lower the private cost of a degree.

But this does also substantially reduce payments by the wealthiest graduates; would that be fair?

The option is there to introduce a free standing graduate tax. A 1% tax above the threshold would produce £1bn a year after 20 years and £2.5bn in the longer term. It would take time to start as you wouldn’t want anyone to be paying more than the current 9%. But it soon be generating useful funds.

My model doesn’t depend on it. But it may be part of the longer term answer of generating new, hypothecated income for our universities.

Second, no one is going to price a part-time degree higher than a full time degree, so part-time degree costs will fall. So we can trigger a renaissance in part time education.

Thirdly, you would really want to integrate these reforms with higher level apprenticeships and the real problems of taught masters. We can at least see the analogies between higher level apprenticeships and employer co-sponsored degrees, and it’s worth noting that an integrated masters degree, with intensive teaching, would cost students less than a current three year degree.

Fourth, It won’t be long before the most research intensive universities – come along and ask ‘can we put our fees up now please?’. This is indeed more politically feasible than under the current model.

But we shouldn’t rush into it. We’ve raised university spending by £700m, largely by reducing obligations on the more expensive universities. So we need to know more about the impact of these reforms on different types of university.

But, in any case, tough conditions would have to be met. We would need a self-limiting clawback mechanism of the type proposed by Browne; universities would have to take responsibility for any additional fee loans and write-offs; they would have to demonstrate collaboration with other local universities on courses and mutual recognition of credits; and they would have to deliver progress, not aspiration, on widening participation.

Fifth, I’ve not looked at implementation. But I would note that if we started now we could take advantage of the current demographic decline and reduce the number of three year degrees more than the proportion of students taking them. We could build demand for intensive courses, beginning by ring-fencing money for the growth in employer co-sponsored degrees.

Several people have already asked whether this is about to become Labour policy.

I certainly hope Labour will look at this, but I hope others will too.

The modelling is crude, the assumptions broad, the approximations considerable. It’s not a detailed plan for higher education and it’s in no state to go into anyone’s manifesto!

We’ve had enough damage done by enthusiastic politicians working on the back of envelopes already.

Wouldn’t it be good if BIS now took this concept, put it in their more sophisticated models, and informed a genuine public debate? But that would take Ministers who don’t feel personally or ideologically wedded to the current system.