Decisive action needed on student fees

The Times has revealed that 75% of universities are intending to charge at least £8000 when new undergraduate fees come into operation from next year, rather more than the coalition anticipated. This is throwing the government's spending plans out of kilter, as higher fees mean that we pay out more in student loans. The element of subsidy in these loans - the lower-than-market interest rate plus the high repayment threshold and the write-off facility - counts as public spending. To keep within the fiscal consolidation plan, then, there may have to be new restrictions on student numbers. A real market in higher education looks further off than ever.

It was entirely predictable that most universities would choose to charge fees at or near the upper limit proposed by the government: this is exactly what happened when top-up fees were introduced in 2006. It might have been better to adopt the Browne Report proposal to have no upper limit, but in effect to ‘tax’ high fees.

The government needs to act decisively if its higher education policy is not to collapse into farce. One way forward, if restrictions are to be placed on numbers, is to auction places to higher education institutions, including the new private entrants which David Willetts is keen to encourage. Providing clear quality standards are met - to be enforced directly and transparently rather than through the cosy arrangements of the Quality Assurance Agency - places should go to the lowest bidders. If elite universities do not want to play this game, they should opt out and go completely private.

A less dramatic alternative might be to reform the student loan system. A fundamental problem with the current dispensation is that risk is borne by the taxpayer and the student, but not by the university. Institutions do not suffer if they accept weak students and fail to support them - and don't enable them to get good degrees and good jobs. If universities had to bear directly part of the loss on students who will never be in a position to repay loans, it would incentivise them to improve student performance, to design career-relevant degrees, and keep fees (and thus exposure to losses) down. A clever scheme to make the risk of at least part of the student's loan fall on universities was set out by Neil Shepherd in Economic Affairs last year. I commend it to Messrs Cable and Willetts.

Indeed - I was still a university governor when I wrote in December how bad a settlement the new proposed system was going to be. I like the reverse auction idea, but I would much prefer lifting the cap entirely and making all universities fund every pound above £6,000 or some such figure from their own resources including fees. But maybe there are other possibilities as well. I wondered about using a system like the JAK Bank in Sweden to fund loans that were then paid off after graduation without interest per se, but with a stipulation that when you finish paying the off you also have to contribute to the fund for a certain number of years to finance students coming after you, beginning the process of tying many more alumni than at present into lifelong membership and contribution to their almae matris.

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