£6,000 fees: unanswered questions

The Labour Party proposal to reduce full-time university fees to £6,000 in England brings higher education towards the centre of the coming General Election. Although the election result is completely unpredictable ten weeks out, it’s worth looking at the Labour plan in detail because it might shape future policy – even if just by prompting a change from the other parties.

Rather than look at the pros and cons of the policy, this article examines ten implementation issues.

1. Timing

The Labour Party promise that they will reduce full-time higher education fees to £6,000 by 2016-17. Applications via UCAS start in the September of the previous year so this will require quick action to legislate to make this change a reality.

Changing the fee cap is relatively easy. Sections 23 and 24 of the 2004 Higher Education Act allow government to order HEFCE to take account of the fee cap when it allocates funding and to refuse funding if it is breached. The rules set a “basic amount” (currently £6,000), above which OFFA approval is needed, and a “higher amount” (£9,000). If a new government wants to introduce new fee caps for all full-time students, it needs to amend these figures via a vote in both Houses of Parliament. This is what the current government had to do in December 2010.

There was a significant rebellion in the Commons which cut the Coalition’s majority from 83 to 21 and which saw 27 MPs (21 Lib Dems, 6 Conservatives) vote against their party line just six months after the election. A vote in summer 2015 a few weeks after the general election would probably be easier because the decision would have been previewed in manifestos and any coalition agreements. However there may be complications. Many Peers in the House of Lords see themselves as the ‘guardians’ of universities, so there may be questions raised there about the security of the additional funding and the conditions attached to it. And even if the next government can secure easy passage for a new, lower fee cap, there may be more complications when it comes to changing the duties and powers of regulators like Offa or HEFCE.

2. Full-time higher education students who already pay less than £9,000

When higher education fees rose (in 1998, 2006 and 2012), the increases only affected new students. The Labour plan to reduce them involves a different approach. Reducing fees for 2016 entrants would create a risk that 2015 entrants would delay entry for a year. Those who couldn’t would feel hard done by.

Labour’s proposal is therefore to equalise the situation by ensuring that no one is charged more than £6,000 from 2016-17 onwards. The exact mechanism for doing this is unclear.

An important unaddressed issue is that substantial numbers of full-time higher education students already pay less than £9,000.

Offa’s report on 2015-16 access agreements states that:

• 44 higher education institutions charge £9,000 to every full-time student and that 87 charge lower fees in certain circumstances.
• Nine further education colleges have some full-time courses at £9,000: another 40 have some or all of their fees in the £6,000 to £9,000 range while 160 have no fees above £6,000.

Offa estimates that the average university full-time fee will be £8,830 in 2015-16 and the average college full-time fee will be less than £7,000.

The majority of the 44,000 full-time college higher education students will pay less than £9,000, more than 23,000 of which will definitely pay less than £6,000.

In addition there are now more than 50,000 full-time higher education students enrolled at private higher education institutions who qualify for tuition fee loans of up to £6,000. However, their circumstances are very different because private institutions can, and often do, charge more than £6,000 (or £9,000).

Further education and sixth form colleges are covered by the law in the 2004 Teaching and Higher Education Act, which requires them to secure OFFA approval to charge more than £6,000 in fees.

The key question now is whether the money made available for fee reduction will also be paid to those institutions that already charge less than the £9,000 maximum.

3. Funding arrangements for 2016-17 and beyond

The Labour plan set out on 27 February 2015 involves the following revenue and expenditure:

The phrase “Barnett consequential” refers to the money that will be allocated to the governments in Scotland, Wales and Northern Ireland on the basis of higher English expenditure. One estimate is that Scotland will gain £220 million from this policy. The amount available for English higher education is probably around £2.8 billion.

The distribution mechanism would need to be decided but given that HEFCE already act as the funder and regulator of universities, it would be odd if they weren’t the channel for this money. Given the high-profile nature of the funding, it is inevitable that there would be conditions on the use of the money to ensure that it was spent on reducing fees rather than anything else. This, again, would raise questions about the position of universities, colleges and students whose fee transactions are less than £9,000.

An alternative to routing money via HEFCE would be for institutions to continue to charge fees of up to £9,000, for the Student Loan Company to pay fee loans up to this amount and for HM Treasury to use the additional tax revenue to write off up to £3,000 per loan each year. This option is superficially attractive but international government accounting standards would surely force a future government to classify the £3,000 as revenue expenditure, so the option would be no better in presentational terms while bypassing HEFCE and thus leading to less control of the funds.,

4. The future role of Offa

The Director of Fair Access has had a role for the last ten years in policing bids from universities and colleges to charge fees above the “basic amount” set in legislation. The threshold was set at £1,200 in 2006, was uprated for inflation in the years that followed and was reset at £6,000 in 2012.

A decision to drop the higher fee cap (“the higher amount”) from £9,000 to £6,000 raises an interesting question about what happens to the lower cap. If the “basic amount” is reduced below £6,000, then 150 colleges with full-time higher education fees at this level or below would find themselves brought into an access agreement regime for no obvious benefit. The Offa process was designed to ensure that institutions charging higher fees spent part of the money promoting access so there would be no sense in extending the requirements to those charging lower fees.

However if the basic amount stays at £6,000, then there is possibly no future role for Offa. This would create a risk that the promises in the 160 access agreements get cancelled. Offa estimates that universities will spend £440 million on financial support in 2015-16 and another £277 million on expenditure to improve access.

It seems unlikely that a Labour government would want a contraction in this sort of activity so there would need to be a new lever to ensure its continuation. The new fee reduction grants could be made conditional on access agreements but what would then happen where institutions wanted to make changes or where Offa felt that promises have been broken.

A more immediate issue for colleges is whether to submit new access agreements for 2016-17. 150 colleges offering full-time higher education courses currently do not have access agreements. The deadline for 2016-17 falls on 23 April 2015 – two weeks before the general election. In previous years (for example in 2011), Offa accepted access agreement applications or amendments up until July. It would be sensible for Offa to extend this deadline by one month to 23 May 2015

5. The new fee reduction grant and the 2015 spending review

The spending review needs to take place by autumn 2015 to set budgets for 2016-17 and beyond. The Office of Budget Responsibility reports that current HM Treasury plans suggest substantial cuts to the revenue spending of departments like BIS which are currently “unprotected”. A future Labour government is likely to revise these plans but the leadership have made clear promises to restrain overall spending and to reduce the deficit.

This suggests that the Treasury may ask BIS for reductions to its £13.2 billion revenue budget at the same time as ring-fencing the new £2.6 billion fee reduction grant. There are no substantial low-priority areas left to cut. The table below summarises what is in the budget – BIS revenue departmental expenditure limit (RDEL) 2015-16:

The fee reduction funding of around £2.7 bill a year would be sizeable compared to HEFCE’s current £4 billion budget, £1.6 billion of which is earmarked for teaching funding. Like all government departments and public bodies, HEFCE has to manage its budget within strict rules which require it to keep spending precisely on budget.

Student number controls (SNCs) were first introduced in the early 1990s to achieve spending control and they were significantly tightened up in 2008 to forestall an increase in student support costs. In recent years HEFCE has relaxed SNCs but this has been in a context where tuition fees and loans are the main source of funding. There are no SNCs in 2015-16 but it is implausible that they will not come back in some form to keep control on a fixed budget allocated to HEFCE by the Treasury. If so, it is important that lessons are learnt from the recent experience with SNCs. These lessons include:

• The gaps in higher education entry qualification data which resulted in large forecasting errors when the high grades policy was introduced. In the months after the high grade policy was announced, HEFCE published data which showed that more than 10% of entry qualifications was missing. The prediction about the numbers of entrants with AAB or equivalent turned out to be wrong by more than 10,000 students.

• The way that controls based on entry qualifications distorted admission decisions particularly as A Level predictions are so often wrong. BIS research on pre-2012 entry data shows that there is a significant issue of over-prediction.

• The risk that SNCs reinforce the existing pattern of provision and thus perpetuate a system in which too few students take professional and technical courses.

6. Devolution within England

Labour’s plans involve the national government distributing an additional £2.7 billion at a time when there is a lot of discussion about devolving power and budgets to city and local government. Higher education has generally stood outside these debates but given the recent deals struck by the government with leaders in Greater Manchester and Greater London, it is possible that this will change.

The addition of the fee reduction money would make the higher education budget (£4.5 billion for HE teaching) much larger than the adult further education budget (£1.2 billion) and whereas the former would be largely protected, the latter has been substantially cut. The amount allocated by the SFA for the 2015-16 academic year will be £1 billion compared to £1.65 billion just three years ago – a 40% cut. The city and local government leaders who have been pushing for greater control of the skills budget may decide that they would have more impact if they can influence this new source of higher education funding.

7. The boundary with further education

The current Government introduced further education loans in 2013. These work in a similar way to higher education loans for those aged 24 and over taking courses at level 3 or above. 60,000 people took out new loans in 2013-14 and another 60,000 are forecast to do so in the second year. It is possible under the rules to sign up for a single loan of just over £10,000 but the average loan in the first year was £2,000.

The Government consulted in summer 2014 about extending the loan scheme to many more people (including those aged 19 taking their second level 2 or 3 course). The consultation also suggested the transfer of HND courses from the HE to the FE loan system. There has been no decision on the consultation and none is now expected this side of the election.

Labour’s fee proposal highlights some important boundary issues with further education:

• The availability of funding to reduce fees makes it even more attractive for a course to be within the full-time higher education system rather than the FE system.

• Reducing the fees of degree courses at all universities (including the most prestigious ones) to £6,000 a year removes one of the advantages of sub-degree higher education courses like HNDs. Labour’s proposed technical degrees may also be affected.

8. Collecting student loans

One of the things that prompted the Labour proposal to reduce fees is the widespread concern that a high proportion of post-2012 student loans will eventually be written off after 30 years. This concern has been prompted by the 45% impairment charge that BIS applies to the new loans in the year that they are issued. Several points have been missed here:

• The 45% impairment charge involves a net present value calculation which assumes that government would have made a better return elsewhere with the money spent on student loans. Using a different discount rate in this calculation would have a significant impact on the figure.

• The government will be charging a higher interest rate (4.5% on income above the higher rate threshold) on part of the student loan debt than it currently pays (2.9%).

• A large share of the money that the government will write off in 30 year’s time is the rolled up interest that hasn’t been paid back. The borrowers who are forecast never to pay back their full student loan include graduates.

Nevertheless there are genuine concerns about the effectiveness of the student loan repayment system which were set out in a 2013 National Audit Office report and which may feature in a forthcoming Public Accounts Committee hearing on 16 March 2015. There is a risk that the write off of new student loan debt in 2015-16 may create a perception and a demand that other student loan debt could and should be written off.

This article is based on a briefing note originally prepared for AoC.