If graduates’ economic returns differ so should their fees

The recent IFS Study told us what intuitively we already knew. Where and what you study matters. But the study also provokes some important questions.

First, is it fair that students are liable to repay the same amount, and in many cases will repay similar amounts if their economic prospects differ markedly? Even after controlling for various factors, the study (p.44) found that the median earnings for Medicine are £24,000pa higher than for the Creative Arts. Second, is an effectively flat fees regime an efficient use of public money? As the number of Creative Arts students increases so will future taxpayers’ liability (the RAB charge).

If fee caps differed, these problems could be addressed. But on what basis should they differ? And why exactly would differential fees be an improvement over the current system? Equally, how would any change ensure that fees are in fact different? Fees could differ now, but they don’t.

The IFS study indicates an answer: fee caps should differ by course and institution to the extent that graduates’ economic returns differ. Let me explain. The net graduate premium (NGP) is the current value of the economic benefits of university minus the costs. The total cost of tuition for a degree should be a proportion of its NGP. As long as economic returns differ by subject and institution, there will be different fee caps.

I recommend fees caps based on something like 30% of the NGP.  Figure 1 shows how we might calculate annual fee caps on this basis. (Years of study must be taken into account because degrees programmes have different lengths).

Figure 1: Differential annual fee caps

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There is no uniquely correct percentage, but one question is key: what is fair to students? If the cost of obtaining a degree is about 30% of its expected economic return, it is hard to argue that students are treated inequitably. Table 1 lists some fee caps for different courses based on the calculation in Figure 1.

Table 1: Subject-specific fee caps based on 30% of a subject’s net graduate premium (NGP)

Subject**NGP (£)Fee Cap at 30% of NGP (£)Current value of total fees charged at the fee cap*Current value of total fee cost as %-age of NGP
Medicine & Dentistry308,604.0018,516.2489,021.0628.85%
Subjects allied to Medicine186,392.0018,639.2054,828.3429.42%
Biological Sciences66,443.006,644.3019,544.6129.42%
Veterinary Sciences166,204.0016,620.4048,889.9229.42%
Agriculture73,031.007,303.1021,482.5129.42%
Physical/Environmental Sciences94,021.009,402.1027,656.8529.42%
Maths & Computer Science136,309.0013,630.9040,096.1229.42%
Engineering143,959.0014,395.9042,346.4229.42%
Technology81,085.008,108.5023,851.6529.42%
Architecture, building & planning148,935.0014,893.5043,810.1429.42%
Social Studies103,470.0010,347.0030,436.3329.42%
Law171,543.0017,154.3050,460.4229.42%
Business & administration studies117,853.0011,785.3034,667.1829.42%
Mass communication & documentation33,015.003,301.509,711.5629.42%
Linguistics, classics, & related subjects67,286.006,728.6019,792.5929.42%
European languages & literature66,859.006,685.9019,666.9829.42%
Non-European languages & literature29,675.002,967.508,729.0829.42%
Historical & philosophical studies23,226.002,322.606,832.0729.42%
Creative arts & design16,183.001,618.304,760.3329.42%
Education159,995.0015,999.5047,063.5029.42%

As the IFS study did not calculate NGPs, I have used figures from The Returns to Higher Education Qualifications (BIS Research Paper no.45, July 2011), p.78.

* = assumes a net discount rate of 2%.

** = assumes that all subjects are studied for three years except for Medicine, which is studied for five.

Several fee caps are below the current £9000pa cap. Others are not but as the final column shows the reply to lawyers, medics, and others is simple: the amount they will pay is under 30% of the current value of their economic gain – hardly an injustice.

We can now answer the questions with which we started. Fee caps should differ to the extent that graduates’ economic returns differ. And if the same percentage is used to calculate all fees caps, then, where net graduate premiums differ fee caps must also differ. There could not be an effectively flat fees system like now. The differential would also benefit students, taxpayers and universities.

We should sympathise with students’ demands for free tuition. But there is nothing intrinsically wrong with students paying fees. They benefit, and resources are finite. But fees must be fair. With debt forgiveness broadly as it works now, fee caps that vary to the extent that graduates’ economic returns vary are fair to students.

By tailoring fees to students’ different economic futures, graduates would also repay more of what they borrow. Differential fees, then, would reduce future taxpayers’ liability (the RAB charge) relative to the current system.

Let’s say that a law graduate will earn enough to repay 125% of the £9000pa he currently borrows whereas an art historian will only repay 50%. If both are charged £9000pa each, the total repaid is £13500 or 75% of the amount borrowed. But if fee caps vary things change. Let’s assume a £12000pa cap for law and a £6000pa cap for art history. The lawyer repays all of the £12000, the art historian £4500. The total repaid increases to £16500 or 92% of the amount borrowed.

This example is simplified, but the principle is sound. If graduates’ returns vary by subject and institution, fees caps that vary on the same basis will reduce the RAB charge relative to the current system.

Universities worry that their fee income is static while their costs increase. As Table 1 shows, differential fees would enable universities to increase some of their fee caps. Differential fees would also, I have argued, be fair to students and in taxpayers’ interests. Lobbying for differential fees would avoid universities looking (as they sometimes do) like they only really care about their income and not who pays for it.

But what is to be said against differential fees? One worry may be that some subjects, like the Creative Arts, would die out. Universities could not afford to fund them. We might also worry that because of the fear of debt disadvantaged students may turn away from more expensive degrees despite their economic return. But there remains room for public subsidy. Instead of subsidising every student, though – including the privately-educated Oxbridge lawyer and LSE economist – subsidies could be targeted to a particular course or a particular group of students.

Second, the IFS study shows that returns can differ by gender and socio-economic background. Might universities select more strong-jawed privately-educated white males to increase their fee caps? But, as the IFS study also shows, these factors can be controlled for and removed from the fee cap calculation.

Finally, high-paying employers recruit disproportionately from prestigious universities. But people worry that prestigious universities coast and do not teach well. Equally, less prestigious universities may teach very well but, because of employers’ preferences for prestige, their graduates do not benefit. Under my proposal prestigious universities would get to increase their fee caps, less prestigious universities would not. Is this fair? No, but it is fairer than allowing less prestigious universities to charge students higher fees if, because of employers’ peccadilloes, they will not obtain a higher economic return. We must remember that what is fair to universities (institutions) matters a lot less than what is fair to students (people).

There is more to be said about differential fees. But fee caps that differ by course and institution to the extent that graduates’ economic returns differ deserves a sympathetic hearing. I only hope it gets it.

5 thoughts on “If graduates’ economic returns differ so should their fees”

  1. Paul Youngson says:

    UCL have the eighth worst record in English Universities for taking students from lower social classes and the seventh worst record for students from state schools.

    The IFS research was quite clearly an indicator of parental wealth and not subject studied, students from more wealthy backgrounds get higher tariff points and choose subjects which highly selective universities tend to teach more of such as economics, it’s just that the press release skewed the research towards subject studied.

    What you are actually saying is I want my employer to get more money than your employer.

    What I would rather is that universities such as UCL who don’t take the the disparity in society seriously were to be penalised for this rather than rewarded with even more taxpayer-funded student loan income.

  2. Paul Ashby says:

    “is it fair that students are liable to repay the same amount”

    What they are liable to repay, and what they *actually* repay, varies according to their income during the 30 years after graduation.

    The repayment system builds in a link between *actual* repayment and return, based on personal return rather than the previous average return from one’s course of study. Those with a return below £21kpa pay nothing. Above that it gets complicated, as we know from the various critiques of the various repayment calculators, but in theory at least, those who earn more pay more of what they owe before the 30 year rule kicks in.

    What does this teach us?

    Attempting to use price discipline in the market, when the money actually (re)paid
    a] bears little or no resemblance to the putative ticket price and
    b] bears no resemblance to what the price-setting institution receives,
    is probably doomed.

    However, without income contingency of loans (fees), kiss goodbye to social mobility.

  3. Paul says:

    “But there is nothing intrinsically wrong with students paying fees.”

    Nearly right, try again. Depends if this statement is premised on “education is a personal possession”, or “education is a social good”.

    Once more the political inclinations of the writer are relevant.

  4. Liz Bell says:

    Fees should also reflect the actual costs of running a course. Lab based and subjects such as medicine will have intrinsically higher costs. I worry that applying an external formula such as student eventual economic returns might lose sight of this.

  5. Dan Cook says:

    This is an interesting idea, but I am concerned it would create perverse incentives.

    If risk-taking varies with social capital we could see an entrenchment of privileged students accessing courses with high returns.

    If returns are disproportionate to the cost of running courses, then this regime may not lead to efficient use of public funds.

    There might also be siloing effects on interdisciplinary learning, if fee differences between courses limit modular choice.

    Finally, is there not a bigger economic concern about designing a fee system that systematically reinforces the preferences of employers, no matter how equitable? As price comes to indicate quality for positional goods, we would see financial success reinforced and resourced to expand, at the expense of spreading funding around to create broader-based benefits. Variable fee caps could focus public investment on financially successful programmes that need it least. What happens to educational offerings that have sub-prime financial outcomes? By backing financial outcomes alone, we might end up using public money to create market failure, rather than correcting for it.

    Its an elegant model, but I wouldn’t be happy seeing my taxes used this way.

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