How to raise fees the painless way

The case for requiring undergraduate students to contribute to the cost of their tuition is now widely accepted. Lifetime earnings premiums of between £100,000 and £200,000 from undergraduate study are typical and, whatever the merits of government support for specific groups of students, it is difficult to make a case that all students should have all their fees financed by the taxpayer.

Unfortunately the government’s mechanism for charging students has hit the buffers. Fees are now capped at £3,225 and the Treasury is frightened of the cap being raised. There are sound educational arguments for raising it. The fee cap leads to overseas students paying much more than home students, and this distorts university recruitment policies.

The cap leads to direct government subsidy of university places and this, in turn, leads the government to restrict the number of places on particular courses, preventing successful courses from expanding and others from contracting. There is also an equity argument in favour of raising the cap – why should poor taxpayers pay for the education of those with much better prospects?

Read the rest of the article in The Independent.

Why should the government require taxpayers to subsidise ‘higher’ education at all? If it’s worth doing, then students themselves can choose to pay for it (maybe borrowing from parents or other sources in the capital markets). If it’s not worth doing, why should taxpayers subsidise it?There’s no reason why universities and other institutions shouldn’t offer scholarships to bright but poor students if they wish.It seems only common sense that people who are paying for their own education are more likely to be motivated to work hard.The poor government is now so overstretched that it would be a kindness to remove one superfluous task from their bulging portfolio.

Of course, you are absolutely right and this could be the end result of this proposal. However, we have a problem at the moment. None of the parties will raise the fee cap because of the immediate impact on government spending. Economists also argue that it is reasonable for the government to guarantee student loans (one strand of this argument is that, because slavery is banned, you cannot effectively use human capital as security). If the government guarantees loans even if higher education is subsidised less by raising the fees both the Treasury and the Shadow Treasury team seem to be objecting to the immediate cost.

Under the present arrangements, raising the fee cap could be expected to lead to an immediate increase in up-front government spending because the number of students wouldn’t fall (why should it, as someone else is paying?) but by assumption the fees would increase. So let’s change the present arrangements!I don’t see why the government should guarantee student loans at all (assuming the govermment’s own credit rating makes it a suitable guarantor anyway): I don’t expect the government to guarantee my loan if I decide to buy a car on credit.Politicians may fear the short-term consequences of their foolish arrangements: that is another reason to dispense with their services altogether.

I agree, but am just putting the economic case for government guarantee – and I don’t think we can ignore it. If you buy a car on credit you can use the car as security. Hire purchase, mortgages and so on therefore work quite well. Unfortunately if you borrow money to invest in human capital, you cannot use your brain as security (and long-term labour market contracts that might allow you assign your earnings capacity to somebody else are also unenforcable). This mechanism, suggested by Shephard, allows universities to make (and take the credit risk on) on the additional loans. It is a pretty good “second best” solution which would put private universities on a more level playing field.

Post new comment

The content of this field is kept private and will not be shown publicly.
Type the characters you see in this picture. (verify using audio)
Type the characters you see in the picture above; if you can't read them, submit the form and a new image will be generated. Not case sensitive.

Invest in the IEA. We are the catalyst for changing consensus and influencing public debate.

Donate now

Thank you for
your support

Subscribe to
publications

Subscribe

eNEWSLETTER