Higher Education Funding · • Overview of higher education funding policy • Current higher education system • Analysis of higher education reforms – financial impact of reforms

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


Why might the market alone lead to inefficient outcomes?

1. Credit market failure

2. Risk and uncertainty

3. Externalities

4. Information problems


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


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


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?


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


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


UK higher education finance policy


Source: HESA

0

50000

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150000

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350000

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450000

1967

1969

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1981

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1989

1991

1993

1995

1997

1999

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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


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

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2,000

3,000

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5,000

6,000

7,000

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up

fro

nt

sup

po

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£)

Parental income

bursary

grant

loan

2010/11 system

The current system: net present value of repayments


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)

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

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Su

bsi

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(£

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male

female

all

The current system: Government subsidy


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


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


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

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2,000

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up

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sup

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£)

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

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0

32

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Parental income

grant

loan

2010/11 system Proposed system

Graduates: 78% are worse off, though the system is progressive

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(£

)


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

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15000

20000

25000

30000

35000

0 10 20 30 40 50 60 70 80 90

sub

sid

y (

£)


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%


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


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


•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?


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


Documents

Higher Education Funding · • Overview of higher education funding policy • Current higher education system • Analysis of higher education reforms – financial impact of reforms