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

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)

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.