Friday, October 15, 2010

Higher Ed Finance Reform in the UK

by Daniel L. Bennett

CCAP is generally focused on domestic higher ed policy, but we occasionally comment on the international policy arena as well. The big news in the UK these days is the government's intended "cut of £4.2 billion to higher education budgets." The spending cut is significant considering the UK subsidizes higher education to the tune of about £14.3 billion annually.

Perhaps expectedly, the UK higher education community and students, who have traditionally enjoyed generously low tuition on the backs of taxpayers, are crying foul. One UK higher ed official offered the metaphor of a:
“valley of death” to illustrate the predicament higher education would be in if it suffers huge cuts in government funding but receives no substitute cash from increased student tuition fees
So it appears as though the UK higher ed community will come to grips with direct subsidy cuts so long as they can make up the revenue by imposing higher tuition fees. But it seems as though some influential folks are pushing a form of tuition control via a modified graduation tax. A recent independent report, Securing a Sustainable Future for Higher Education, appears to be paving the way for higher ed finance reform. Here are the highlights of the plan laid out in the report:
Full time students will pay no fees upfront. Government will provide the upfront costs.

Institutions will contribute to meeting the costs of finance for learning. They will receive from Government all of the money for charges of up to £6,000; and pay a levy on the income from charges above that amount to cover the costs to Government of providing students with the upfront finance.

loan system for the costs of living will be simplified to
create one flat rate entitlement of £3,750.

The maximum grant for the costs of living available to students from low income backgrounds on top of the loan will increase to £3,250.

Students with higher earnings after graduation will pay a real interest rate on the outstanding balance for the costs of learning and living. The interest rate will be equal to the Government’s cost of borrowing (inflation plus 2.2%). Students earning below the repayment threshold will pay no real interest rate. Their loan balance will increase only in line with inflation. Those earning above the threshold whose payments do not cover the costs of the real interest will have the rest of the interest rebated to them by Government.

The repayment threshold will be reviewed regularly and
increased in line with average earnings...Changing the threshold in line with earnings increases the costs of loans for Government. Some of that cost will be offset by increasing the maximum payment period from 25 to 30 years. After 30 years, any outstanding balance will be written off by Government.
There are both good and bad elements included in the plan. The good:
It would reduce direct subsidies that contribute to a noncompetitive and inefficient higher ed system

It would transfer more of the financial burden from the public to those who directly benefit from receiving education

It would impose some degree of student choice in how scarce public funds are allocated among institutions

It would benefit low-income students more so than higher income ones, limiting what our friend James Stanfield described as a transfer of income from the poor to the better off – “taxing the poor to help the rich get richer”
The bad:
It transfers the role of government in higher ed finance from wealth redistributor to lender. The government has traditionally failed miserably to run business enterprises, which are better left to the market. Adding insult to injury, the government will charge below market interest levels and will impose progressive repayment terms based on how successful students are after graduation. This will create perverse incentives, not to mention the extremely high opportunity cost of financing loans in the current period. For more critique of graduation taxes, see this post.

Rather than moving towards a system in which tuition is based on a market equilibrium, the government imposes an artificial tuition cap. Government-imposed price controls have historically failed and we should not expect anything different here.

The government would effectively enforce a mortgage on those who attend university by making the loan repayment term 25-30 years. Although "taxing" only those who attended is arguably better than making everyone pay for higher ed regardless of whether they benefited from it or not.
Although the proposal is likely, overall, an improvement over the existing system, it would likely increase the government's role in higher ed, rather than reducing it. Deferring once again to Dr. Stanfield, it would be better if:
the government [restricted] itself to a very limited role in higher education, promoting and stimulating competition rather planning or directing the sector, or using it to meet ‘national objectives’.

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