Are differential fees a practical and fair way to fund undergraduate study? Dean Machin recently made the case for fee caps to vary by subject and institution in line with their economic returns in a blog for Wonkhe. I think the idea needs scrutiny more than sympathy. There are many possible practical challenges, issues of fairness and perverse incentives were differential fees to be adopted.
Firstly, it is simply impractical to link fee caps to expected returns based on historic earnings data. Would fee caps be tied to only data from the most recent cohorts, given that their experience and prospects are likely the most similar to those of prospective students of a course? Or would this omit an indication of the longer term return of the degree? Should the fee cap reflect more historic data on graduate income from, say, the past decade or longer, to better capture the long term performance of graduates, even if the link to the current curriculum and teaching is weakened as a result? What should wholly new courses be allowed to charge? What should new institutions be allowed to charge? There are no obvious answers to these questions. The blanket £9k fee cap certainly has its problems, but it is at least easy to implement.
The government would have to think closely about the institutional and individual incentives that differential fees would create. The most attractive subjects for institutions to teach would become high return, relatively lower cost subjects. Expensive, low return courses would suffer. Basing fee caps solely on economic returns – omitting any consideration of the cost of provision – would likely result in certain high cost, low earnings premium courses contracting or closing, irrespective of their wider benefits. While 18 year olds may be happy to incur the larger debts of high premium subjects, differential fees could be a real bar to the part-time and mature students who have already been deterred by £9k fees. It would be essential to adjust for student backgrounds so that universities were not incentivised to recruit those students from wealthier socio-economic backgrounds who go on to enjoy higher earnings premiums. This would be tricky, but otherwise the new fee regime could incentivise a narrowing of participation.
Policymakers would have to think carefully about how differential fees would encourage good teaching and the impact they would have on quality. University departments could find their current course prices dictated on the basis of historic data for graduates who studied different syllabi a decade ago, with different academics, before emerging into a different graduate jobs market. This would provide limited incentives to adapt courses, improve feedback and raise teaching standards. The likely impact of differential fees on the sector would be to compound inequalities between universities in the UK, with yet more going to the Russell Group while others see stagnant or lower incomes, and thereby entrenching existing hierarchies.
Differential fees based on expected wage premiums would also fail to recognise the wider economic benefits of higher education to both society and to individuals. As Lord Robbins put it, “the return on education… is not something that can be estimated completely in terms of the return to individuals and of differential earnings” and doing so risks “being seriously misleading”. In October 2013, a BIS research paper identified the following: higher tax revenues; faster growth; greater innovation; higher productivity; lower demands on the public finances. For individuals, they also include lower unemployment and increased entrepreneurial activity and productivity.
Furthermore, there are the non-economic benefits, both for society and individuals, ranging from greater social cohesion to a greater propensity to vote. Setting fees to reflect just one individual economic element of a university degree would be simplistic and fail to place value on those broader important considerations.
There is much to commend in the idea that higher earning graduates should make a greater contribution. However, is differentiating students’ initial liability the best way to do that? Graduates may have similar paths but there is much variation between graduates at similar institutions and courses, as the IFS report demonstrated. This is unsurprising given the varied career paths for graduates from all subjects. It is not hard to think of how unfair situations would follow: why should the law graduate who scrapes by in legal aid be encumbered by an enormous nominal debt liability while the history graduate who works in the City making a fortune have a low nominal debt liability? In essence, differential fees by subjects would risk recreating the unfairness of the current £9k system at the subject level. An alternative way to ensure those who benefit pay more would be to charge graduates who earn more a progressively higher interest rate on their student debt repayments. This would ensure students who have higher earnings premiums pay more and it would be automatically responsive to evolving returns, both positive and negative, irrespective of course studied and institution attended.
Would differential fees save the taxpayer money? They might lower the BIS RAB charge if introduced on the basis that Dean proposes in his article. However, the consequence of differential fees could be a higher wage bill for the government elsewhere. If junior doctors are tempted by Australia now, imagine how many more would emigrate with their debt doubled, unless they saw their wages being increased to compensate. Concerned about a shortage of STEM graduates going into teaching? Higher debts would make the job in the City all the more attractive, necessitating higher pay for teachers.
Of course, depending on how they were implemented, differential fees could also result in a much higher cost to the government. I would not be confident that differential fees would be linked to income as Dean recommends. In the past, both UKIP and Labour have proposed (or considered proposing) that students ought to pay lower or no fees for STEM degrees in order to attract them to study those higher earning subjects. It would be ironic if those championing differential fees to reduce the RAB charge opened the way for politicians to create one which would be more impractical than the current system, less fair and would actually increase the cost of higher education to the taxpayer.