Damage beyond the RAB

There has been a significant volume of news about the extent of student loan write-offs in the last week and the potential impact on the Exchequer; however, much of the commentary – especially in the second news cycle – might be missing the point.

For at least four years (since the Browne Review), several organisations have suggested that the reforms of higher education fees and funding proposed by the current Government would be more costly to the Exchequer than originally suggested. This has proven to be the case. However, if there had been more clarity in the first instance about the potential contribution of the state, would much of the recent news about the 45% RAB charge have seen the light of day? It would appear unlikely.Fundamentally, it is not the level of public funding of higher education that is necessarily the ‘issue’, but the fact that the original assessment of cost was so far wide of the mark, and as a result, so were the claims of the impact of the reforms on the fiscal mandate.

The original reforms replaced direct HEFCE Teaching funding with tuition fee backed loans (relying on a healthy dose of financial wizardry). Rather than the government contributing approximately 94% of the cost of higher education (compared to students/graduates 6%) as was the case for the 2010/11 cohort, the HE reforms attempted to re-balance this contribution. It was originally believed that the relative contribution for the 2012/13 cohort would be closer to 75:25. However, the state of the graduate labour market and the associated hit that the RAB charge has taken has put paid to this. But before further talk of the fiscal black hole emerges, it is also important to remember that even if there had been no changes to the HE fees and funding regime in 2012, the RAB charge would have increased anyway. The RAB charge on pre-2012 loans now stands at a staggering 40-45%, and the rapid deterioration of the graduate labour market has very significant long run consequences for the economy.

Apart from the current estimate of the RAB charge being greater than the previous estimates of the RAB charge, what is the real issue? From an economic perspective (but more my opinion dressed up as economics), all forms of education should be invested in. The long run economic benefit associated with educational attainment greatly exceeds the economic cost of provision. Enhanced education levels have dynamic effects on economic growth and there are spillovers associated with the investment in human capital that are potentially as large as the direct effect. Given this, the 45% RAB charge can be seen as a distinct positive from a public policy perspective. The government has (perhaps unwittingly) provided a healthy subsidy to students/graduates in the form of loans; graduates are not funding the full cost of their own higher education (though this may not be a positive from their perspective given it is associated with poor labour market performance); and higher education institutions are allegedly better off than before (although there is significant variation and uncertainty across the sector, which is likely to increase when the cap on student numbers is removed).

So, recession aside, has the Government ended up in the place it wants to be? The RAB charge may be at its high-water mark, but as the economy recovers so will graduate earnings, and the RAB will decline thereby demonstrating Exchequer savings going forward. HEIs are better off (in aggregate) though with more uncertainty. Students/graduates are receiving a healthy subsidy through an income contingent loan repayment system (if they can get beyond the £40,000 debt). No problem!

There are two major issues that have not received the attention that they deserve and it is necessary to ask whether these outcomes are beneficial going forward. These are the areas where the greatest damage may have been done in the transition to the current fees and funding system – both because of the outcomes themselves – but also because the fact that the changes may be irreversible. Tweaking the loan system will not solve these problems.

Student Numbers: The first issue is that the increased aggregate costs of higher education are associated with a smaller student body. As such, with the RAB charge where it is, the average cost of provision has increased. This suggests that there has been a loss of efficiency from an economic perspective (‘buying less with more’ is the opposite of what we should be trying to achieve from reforming policy). More importantly, the nature of the student body has changed. The part time sector has been decimated following the changes to higher education, with the increased tuition fees imposed on part time students disproportionately damaging this hugely important sector. In the past (especially in 2002-03 when move towards £3,000 deferred fees was being worked through), part-time students were essentially ignored. Ten years later, little attention has been paid to the consequences of recent reforms on part-time study and the 40% reduction in numbers is a reflection of the damage done.

The second issue is that there has been a drastic increase in the number of students enrolled with private providers. Recent estimates suggest that there have been approximately 40,000 students who have enrolled on (predominantly) sub-degree level courses. Following the marketisation of HE, the incentives are now all wrong and the provision of higher education through private providers represents a serious funding issue. With many of these students eligible for maintenance grants and loans (with limited probability of repayment), and providers receiving the government backed tuition fee, it appears to be a one-way bet (with the government on the receiving end). Clearly, although many of these providers are reputable and may have had a beneficial impact on the HE ‘market’, in a number of cases, there may have been relatively limited investigation of the quality of provision or provider reputation. Significant uncertainties in relation to the level student progression may emerge over time, which suggests that the cost per successful qualification attained may be high and represent a very poor return to the taxpayer.

Reforms of higher education fees and funding were necessary in 2012. It is right that the individuals predominantly in receipt of the benefits of higher education should pay a greater proportion of the cost, and that there should be a strong insurance system in operation to protect those that earn less. However, even as the economy recovers, the costs of transition and the unintended (though predictable) outcomes associated with the 2012 reforms may have longer term consequences on the economy that are only just beginning to bite.