Private lives of the British university: a vision of the future?

The rumours of elite universities rushing towards unilateral privatisation have been quiet of late, but this may cease-to-be if future reforms to teaching and research funding fail to give such institutions sufficient incentives to remain in the public domain.

Just under a century ago, Cambridge and Oxford called in the commissioners and received regular public money for the first time. There was, of course, no mention of QR funding, RAB charges or TEF in any earlier legislation; nor even in Elizabeth I’s Oxford and Cambridge Act of 1571. For much of the past 100 years or so, the idea that British universities might be 'private' - that they might choose to opt out of public finance and associated regulation - has been little more than a speck on the most distant horizon.

But a few years ago that speck began to grow. In 2009, Imperial’s Rector proposed creating an Ivy League of private UK institutions. In 2010 – and sporadically since – there were hints and rumours that Cambridge had seriously considered going private. This was hardly surprising for some players in the bustling higher education marketplace where many vice chancellors complain - prompted no doubt by their finance directors - about the real-terms cut in fees with the level frozen at a maximum of £9,000 for home and EU undergraduates. There have been regular claims that the Oxbridge offer costs as much as £16,000 per year to deliver. However, whenever universities have threatened to privatise their teaching operations, HEFCE have responded with the far greater threat of removing access to QR money (worth over £1bn in 2016-17).

So until recently, British universities looked set to stay as broadly public institutions. However, the Higher Education and Research Bill looks set to change all that. It proposes to dissolve HEFCE and with it the link between public funding for teaching and research. There is a good chance that some universities may look again at the costs and benefits of public finance. Accompanying the TEF comes a carrot of only modest increases to fees but also a significant regulatory stick. This is not perhaps the most alluring deal for some universities, particularly when you throw into the mix that the National Student Survey (NSS) may play a major role in the way that TEF is conducted and assessed. Some institutions with ‘top’ reputations score quite badly by this measure, particularly in London.

If some universities bridle at the idea of limited rewards and larger punishment in the new higher education marketplace, how would they attempt to seek ways around it? There are plenty of different options, but two seem particularly obvious.

Scenario 1- The [Pr]Ivy League

Let’s assume, bolstered by the recently-published IFS research into graduate earnings, that there are some institutions which could borrow competitively to fund their own loan schemes, issuing bonds each year underpinned by the earning potential of the graduates they produce. That would allow institutions to offer the same package, or an even better one, to prospective students with similar lifetime payback arrangements. If we assume that the effective RAB charge for Oxford, Cambridge, UCL, Imperial and LSE (and probably some others) is near zero, then this is a good deal for bondholders and taxpayers too. That said, past performance - even eight hundred years of it - is no guarantee of future success.

Having established a mechanism to turn graduates’ future earnings into cash now, these institutions could charge what they see fit, and many people could and would pay upfront. This could create a model similar to the US Ivy League with fees above-and-beyond costs being used to subsidise poorer students. If a pay-back regime via the Student Loan Company and PAYE could be developed, then the experience for the student and graduate would be very similar to the public loan, but the burden of raising the funds would fall to the universities.

Scenario 2 – The alternative alternative

Why should this just be a model for an elite group? When HMRC data is linked to individual students' data, it will be possible for all institutions to demonstrate just how lucrative it is – on average – to study with them. An enterprising modern institution, which might not have the very top credit rating of the older universities, could work with banks to develop financial products tailored to individual students. With interest free periods, buy-now-pay-later, and flexible repayment methods, students could have a range of offers beyond the single government-backed loan.

These might be more expensive for students in the long run, but they’d probably be most used in key markets like business and law where likely earnings will be more than sufficient. These place the burden on the individual to repay with the bank, rather than the university liable for bad debt. It’s another way out of the TEF, and if enough institutions chose to reorganise this way it could become the dominant model for key vocational subjects. It also spreads the risk and gives flexibility to universities to charge as they feel appropriate, perhaps even achieving the differentiated fee structure intended by the last government.

They saw us coming

Within the White Paper is the concept of the “Basic”, “Approved” and “Approved (fee cap)” provider classification (see box 1.1 on p24). The capped fee providers have the most stringent conditions, but they get to charge up to a higher level. It’s the Approved providers which have the lighter burden, and in return can set unlimited fees. But it looks as though they won’t be eligible for any type of teaching or research grant. That leaves the prospect of a non-research private institution (the New College of the Humanities, say) with significantly greater flexibility than any mainstream university.

Let’s recall that “dual support combines project funding for excellent research proposals, which is forward looking and assessed through peer review, with formula based quality-related research funding that rewards performance retrospectively based on peer review and proven impact from the research.” (White Paper, p67). Can it really be the intention that institutions that do no research can be offered a more flexible arrangement than teaching-and-research universities? What kind of level playing field is that?

Now's the time

The White Paper and proposed bill could introduce the conditions for privatisation if research is to be funded separately from teaching. If participation in the TEF is optional - essential only for institutions that want to raise their fees through the government loan scheme, and then only by inflation - then going private may prove to be attractive.

Some institutions could enjoy the best of both worlds if the new category of Approved provider is given access to research grant (QR) funding while they raise teaching income privately. The transparency revolution could help further by demonstrating to the financial markets the viability of private individual loans, freeing even more institutions of additional red tape. And it would reduce the overall taxpayer bill resulting from the student loan system.

The government has added layers of market control which will push institutions to consider their options. There’s time before proposals in the White Paper become legislation: will the bill take the next step and leave the door open to privatisation of teaching? At the very least, expect some lobbying on this issue because the stakes are too high for some to let this opportunity slip by.