Cartel schmartel

The question of university tuition fees in England is causing brouhaha again. Part of the issue seems to be some Conservative ministers wanting to catch up on an issue where the Labour Party had the edge on them at the recent General Election. Part of the issue appears to be a Damascene conversion by Andrew Adonis, the behind-the-scenes architect of the 2004-06 increases in tuition fees, and in particular his assertions that universities are operating a cartel about fees. A particular trigger appears to be recent revelations about the amount of debt that students will incur and not repayhttp://www.bbc.co.uk/news/uk-politics-40547740.

At heart, a lot of the issues appear to relate to the consistent £9k fee charged by universities in England. This costs more than the government planned (an estimated cost of £7.5k per student per year underpinned the calculations in 2010 and 2011). So why do universities charge £9,000 per year? And why do students pay?

(Cautionary note: although I graduated from LSE, I am not an economist. But I don’t think that arguments I make are bad arguments. Second cautionary note – the Higher Education and Research Act and the Office for Students changes a lot of the nomenclature in this, but the fundamentals remain the same.)

(by the way, on this general topic here is a really good article from the BBC showing some data about this complex topic)

Firstly, let’s look at the question of why students pay.

The student loans scheme in England is not like a normal loan. Repayments are contingent upon income levels (ie you don’t pay until you earn £21,000 per year; and then you pay a flat rate 9% of income over 21,000 per year.). You keep paying until you’ve paid off the debt, or until 30 years post-graduation.

This means that many won’t fully repay their student loans, as their income levels between 21 and 50 aren’t high enough to have paid for enough years. It also means that for any given level of income, the amount you repay would be the same regardless of the amount of loan you took out. Let’s show how that works:

Student A borrowed £9,000 per year - £27,000 in total – to fund tuition fees at Poppleton University. They now earn £25,000 per year, and so every year they repay £360 – that is, 9% of £4,000, which is the difference between their income (£25,000) and the threshold (£21,000).

Student B went to the Poppleton Metropolitan University which charges £6,000 fees per year, so they borrowed in total £18,000. They now earn £25,000 per year, and so every year they repay £360 – that is, 9% of £4,000, which is the difference between their income (£25,000) and the threshold (£21,000).
You can see that the annual amount of repayments is not related to the amount borrowed. Total amount repaid does relate – in principle – to the amount of borrowing, but you’ll only be expected to repay all of the debt if you earn enough.

This leads to my first proposition: the loans system does not encourage students to be price-sensitive.

The second question relates to why universities charge £9,000. It’s important to understand how this £9,000 is made up. The legislation provides for a standard amount (£6,000 per year) and a variable element (initially an additional £3,000 per year, now £3,250.)

Any approved English HE provider can charge £6,000 per year. Institutions can charge an additional fee if they have an access agreement with the Director of the Office for Fair Access (OFFA).  The Access Agreement sets out what additional fee they plan to charge, and what they’ll do to ensure that this does not militate against fair access. The assumption was that only in exceptional cases would £9,000 be payable; but there was no mechanism to enforce this. OFFA had to judge each application on its merits. And so if, say, University A had got an access agreement for £9,000 fees with fair access spend of £500 per student, then University B which proposed £9,000 fee with £500 fair access spend per student would be able to argue that to deny them the right to charge £9k would be perverse. The quality of the university was not a consideration.

In that initial round, nearly every university had its access agreement approved without conditions; a few had to make revisions. But none were turned down. £9,000 proved not to be exceptional.
Why did universities even suggest such a fee level? In part because fees act as a marker for quality. If your rival charges £9,000, why would you charge less? To do so could be to indicate that you weren’t as confident as your rival in the value of your offer.  It isn’t about greed or excess; simply about market position.

So this is my second proposition: there was no incentive for universities not to charge £9,000.

Also relevant was the actual behaviour of students. When setting higher fees for the first time, many university governing bodies recognised that they were entering the unknown. There was a recognition that student numbers might well fall. So a £9,000 fee, together within internal budgeting for fewer students, would make sense. We put on a brave face for the world, but plan for hard times. As it turned out, student numbers did not (after the first year) decline. And this is the third factor which I think is relevant.

Student recruitment has historically been controlled by the government, through a funding cap. Essentially, universities had a recruitment target set by HEFCE; there were penalties for exceeding this. When the cap was relaxed and then removed, as happened in 2013-14 onwards, universities were free to recruit as many students as they liked. This meant that a university which was growing could afford to spend resources on other activities, as in most cases the £9,000 fee was greater than the full cost of teaching. This enabled development of new subjects; investment in new buildings for teaching and research; and investment to improve reputation in, for instance, the REF.

This creates my third proposition: universities had many incentives to grow; few to remain the same size.

Put these three factors together, and a lot of the features of the current system become clear. £9,000 fees were the natural desire for universities. There was no price competition between universities, because enough students (in a growing market) were not price sensitive. So £9,000 becomes the norm.

This isn’t a cartel. Universities are by habit compliant with law and regulation, and the injunction ‘do not discuss fees with your peers’ was, in my experience, very well observed.  But it was bad regulation. The design of the system did not, beyond pious words, prevent £9k becoming the norm.

What would Nick do?

 Equally, universities had for decades been enjoined to behave more entrepreneurially. In relation to PGT fees, universities were encouraged to see these as a price, not a cost. Would students pay the fee? If so, charge it. If the fee wasn’t enough, stop teaching the programme. And this habit infused undergraduate fee decisions. It would be possible to regulate or legislate for a fee regime that reflected cost not market price. But this wasn’t done.

So what is to be done now? I’ve a simple plan. Ask Nick Barr. He’s Professor of Public Economics at LSE, knows more about higher education funding than almost anybody else in the world, and is wise and fair-minded. Ask Nick Barr how to fund students and universities on a fair and sustainable basis. And do what he says.

Will the green paper lead to EVEL legislation?

There’s lots written already on the HE green paper and no doubt more to come. My first two-penn’orth is on the question of scope.

David Kernohan on Wonkhe points out, rightly, that the impact of the green paper will not be restricted to England. Quite apart from Sir Paul Nurse’s research review, the impact of the green paper proposals, if enacted, would be felt in universities across the UK. For example, differentials of funding, student information, and perceived status could all increase. If the rest of the world routinely understood the nuances of the UK’s nations (and that fact that England does not equate to Britain, and vice versa) this might also impact upon international issues.

A number of the proposals in the green paper would require primary legislation. HEFCE has a statutory basis in the 1992 Further and Higher Education Act, for instance, so abolishing it needs an amendment to that Act. Would any legislation be considered under the English Votes for English Laws (EVEL) procedure?

EVEL was introduced earlier this parliamentary session, and essentially gives English (and Welsh, sometimes) MPs a veto on legislation which affects only England (and Wales too, on some occasions). It was meant to answer the West Lothian question, but of course it doesn’t provide a satisfactory answer – it was hurriedly thought through to deal with politics, not governance.

It means that legislation which affects only England (or England and Wales in variant b) cannot be passed without the assent of English (and Welsh) MPs, but it doesn’t mean that legislation affecting England (and Wales) will necessarily be passed just because it has a majority of English (and Welsh, sometimes) votes. Any bill still needs to be passed by Parliament as a whole, and as the UK government is finding out at the moment in relation to Sunday trading, that isn’t a given.

The green paper has mixed messages here. Firstly, and one would think unambiguously,

46. Higher education is a devolved matter in Scotland, Wales and Northern Ireland so most of the proposals in this document apply to England only. However, the funding delivered through the Research Councils and some broader elements of research policy are reserved matters, so the proposals in Part D have UK-wide applicability. (pp16-17)

But then consider later on, in relation to TEF:

16. Our intention is that the TEF develops over time to be comprehensive and open to all HE providers in England, including alternative providers and further education colleges delivering HE provision. As part of this consultation, we are also discussing with Devolved Administrations, whether and how they would like to be involved in the TEF. (p21)

Let’s be blunt – they won’t really have a choice. Universities in Wales, Scotland and Northern Ireland are operating in the same environment as those in England – students are making choices between them, research funders are comparing them. It is in their interest to be in an environment which broadly mirrors that in England.

Devolved administrations will know this, and whilst in Scotland there is an attempt to follow a different path, Wales and Northern Ireland have adopted policies which recognise the connection with the English environment. Sometimes the devolved administration has done it better than England. Despite some worries about close scrutiny, for example, Wales has a simpler approach to access than England, with HEFCW signing off fee plans (the equivalent of access agreements) as a condition of funding.  The link between higher fees and the public interest, which is what OfFA was set up to ensure, is (pleasingly) clearer and easier across Offa’s dyke.

More significantly, perhaps, is that even though HE is a devolved matter, it isn’t a fragmented system in the eyes of staff and students. Cross border flows of both are real, ideas and practices are shared. I’d hope that when it comes to primary legislation, the bill isn’t regarded as EVEL.

Which isn’t to say that it won’t be evil – there’s lots to argue about in the green paper - but please, Mr Speaker, let’s make it an inclusive debate.

Fair access?

There’s a fascinating pair of stories on the BBC Education website today.

Firstly, university access, and the release by OFFA of details of access agreements for 2016-17. Access agreements are the documents which set out what resources English universities will commit, from their tuition fee income, to support access by students from socially under-represented groups to higher education. There’s lots of data in the report (pdf file), about which perhaps I’ll post another time, but for now what caught my eye was the spin in the reporting:

“Universities agree to take more disadvantaged students” (my emphasis). 

As if the reason for disproportionately low participation rates amongst some social groups was all to do with universities’ willingness to admit students and not to do with a myriad other factors.

And the second story: that the average cost of school-age private education in the UK (that is, the fourteen years from ages 5 to 18) is £286k and, if on a boarding basis, £468k. By my reckoning this makes £20k plus per year or, at the boarding rate, £33k per year. So, parents who send their children to private schools think that the investment is well worth it, and they spend a lot of money on it too.

There’s all sorts of trails to follow from this. One is about class sizes and contact hours: private schools do well in part because they have smaller class sizes – the pupils get more attention from their teachers, and hence do better. At a cost of £20k per year. Compare the pressure on contact hours for universities where fees are set at a maximum of £9k per year. I can do the maths, and it doesn’t surprise me that universities are feeling the pinch a little – although £9k per year feels a lot for a young adult to take on as their first financial obligation in life, it isn’t much compared to the amounts parents are willing to spend on their children’s behalf.

Another is about how to address widening participation. By and large universities admit on the basis of prior educational attainment. Better A-levels get you into a better university. If you want to increase participation from deprived social backgrounds, invest in the schooling – more teachers, better equipment. It’ll help get better outcomes for the children. More of whom can then get into university.

Just your average students

And if you want to think about raising their aspiration to go to university? Rather than beat up universities, I think a better place to start is asking why society enables some parents to buy their children a brighter future, and how does the dominance of certain social groups in our society persist. The Bullingdon Club of the 1980’s is ruling the country now, and I’d be astonished if the rulers of 30 years’ time weren’t about to enrol in Oxford and Cambridge, having come from the better private schools.

Here we go again ...

As expected, Labour have now announced their policy of reducing home/EU undergraduate tuition fees in England to £6k per year, from the current £9k. (The policy only affects England, as higher education is a devolved responsibility).

There’s already much argument about the merits of the plan. To summarise, in the Pro camp, you’ll find the observation that the system is broken and something needs to be done, or public debt will spiral out of control; that the perception of debt is a fear as much as the actual debt; and that an increase in the maintenance grant is a good thing. On the Anti side you’ll see the observation that this puts long term university funding at risk; that it benefits only better off graduates; and that there isn’t a long-term problem that needs fixing.

November 2010, 30 Millbank ...

Here’s my take on this.

Firstly, the system is broken. Although forecasts about the RAB charge and the amount of debt that will not be repaid are only forecasts, it is unarguable that the average level of tuition fee actually charged is substantially greater than the £7,500 on which the policy was based. £9,000 was meant to be charged only in exceptional circumstances; it has instead become the universal norm. In these circumstances, it’s hard to believe that there’s no effect on public finances. And as the coalition’s plans for reducing the public deficit have not borne fruit (despite what George Gideon Oliver Osborne says) this must be a problem for the future.

Secondly, it is correct that the money benefit will go to higher earning graduates. This is straightforward mathematics. What is also true is that the perception of debt will reduce, and that will, I think, remove some disincentive to potential students and their families. How much? We won’t ever know, so that’s a matter of faith.

Will it reduce university funding? It all depends on the nature of politics and public funding, and the effectiveness of future HE ministers versus chancellors. So that’ll likely be a ‘yes’, then, but at some unknown and unspecified date. A government response will be that it serves universities right for being greedy in fee setting in the first place, but as the whole £9k fees policy was a dog’s breakfast from the outset this is just name calling.

So let’s speculate that Labour get into government with a working majority. How would this be implemented?

The framework within which fees are charged is that laid out in the 2004 Higher Education Act – there’s a basic amount and a higher amount. The basic fee level was set – after the 2010 discussions – at £6,000 per year; the higher amount is £9,000 per year. These are in the precisely named Higher Education (Basic Amount) (England) Regulations 2010 and the Higher Education (Higher Amount) (England) Regulations 2010.

The way it works is that any approved provider can charge fees up to the basic amount (£6,000); to charge at the higher amount (£9,000) you need to have an access agreement approved by OFFA.

So far, so good. The rub is that the basic fee amount is what private providers (eg BPP University, University of Law etc) can charge; the higher amount applies to HEFCE funded universities. On the World at One this lunchtime Chuka Umunna – Labour’s BIS frontman – said that the intention was to continue to require universities to pay bursaries and support access, implying that the basic/higher levels, and the requirement to submit an Access Agreement to OFFA, will continue to apply.

This suggests that the Basic Amount will be reduced to £3k, and the Higher Amount to £6k. If this is the case, then private providers won’t, without further legislation or specific regulation, be able to charge the £6k they are at present.

If this was part of Labour’s plan I’d have expected it to be talked about: you can make good political capital about “clamping down on dodgy profiteering colleges”, even if this is probably unfair when applied to the larger and more reputable ones.

An unanticipated consequence, perhaps?