Jacqui Smith goes searching for funding options in Reading

At Universities UK Conference in Reading, the new universities and skills minister Jacqui Smith only really had vibes on funding to offer:

I started by talking about the financial peril that the sector faces because that is the first thing that people said to me, and it would be wrong not to not to recognise that. And I also said we are working on options. I showed a teensy bit of leg, and that was the maximum that I’m in a position to show at this moment, I’m afraid.

It’s not especially surprising that Smith wasn’t able to share anything concrete – even if there was a bailout fund or a fee increase in the offing, both would be impossible to even hint at in the same week that Keir Starmer was fending off attacks over the cuts to the Winter Fuel Allowance at PMQs.

Luckily for Nick Watt on Newsnight, a cabinet member had shown him a bit more “leg”:

I spoke to one minister who said “we are worried”. They are working on a potential rescue plan – the word is that they can’t help all universities, and there won’t be a blank cheque.

They are talking about stepping in in one of two categories – firstly, if a university looked like it was in jeopardy, and that would have a knock on effect on the rest of the sector, they would act. The second one is, if a university looked in jeopardy and that would have an impact on investor confidence, they would step in.

They’re [also] saying that universities really can make serious efficiencies.

On the UUK end of things, VCs were reminded in Reading that its “blueprint” is on the way – and as it becomes more like NUS (notably more public in its attacks at least on the previous government than it has been in the past), it even had a go at a vote on conference floor on whether it should err towards moderate or ambitious in its asks on funding.

I could hear Sir Humphrey in my mind when I saw that the vote was about 60 – 40 in favour of being bold – partly because the sector still seems unable to explain where the money goes, why the unit of resource can’t fall further (to, say, Scotland’s level) or why even if it could explain that it should be nearer to the front of the queue than all of the other deteriorating public services that also argue they’re essential for growth.

Going local down in acapulco

If you were over-analysing the vibes in the speech, you’d pluck out this bit that followed from the Skills England reminder:

…what more then can we do to encourage this role and to ensure that partnership and collaboration with each other, with further education, with local government, with employers and with communities.

That returns us to the big problem that the government has – that in shifting to a largely-loans system (with no number controls) for funding higher education, its predecessor ceded much of the ability to influence the sort of graduates it wants and the places that it wants them.

Conversely, if you have a higher education funding system where the taxpayer pays for all (or at least most) of the cost, you can exert control. You can decide how many undergraduates enrol, you can decide where they enrol, you can decide what they study, and you can decide what qualifications they emerge with.

As such, the big switch in the last decade can tend to be framed as a triumph over the man in Whitehall who knows best. More students got to do more of the things that they wanted to do where they wanted to do them.

I won’t repeat here the problem with that illusion of choice – that when the public subsidy in that system gets too high for the man in Whitehall’s liking, revenge is taken by finding other ways to exert control that make higher education worse for everyone.

But we should reflect for a moment on the differntiality of it all, and whether fairness has been harmed in the slow process of the Treasury taking its revenge.

It’s the same but different

The introduction of £9,000 fees for home undergraduates is often painted as an extension of the system introduced by Tony Blair in 2003/04 – after all, much of the legislation from that era continues to govern institutional funding today.

But the 2004 system was designed to allocate fixed numbers, take a small(ish) flat fee from students, allow graduates to repay it on an income contingent basis, and top up for all sorts of factors like subject and need.

I doubt anybody thought that anyone could deliver an actual HE programme on £3,000 alone. And so its flat nature, plus its egalitarian recovery methodology, is almost certainly what allowed it to squeeze through Parliament and survive for a decade.

That system was not so different to what’s emerged across Europe. Those that have fees either differentiate through a means test, or through subject, or both. But because the contribution is small as a percentage of the overall cost, it doesn’t matter much. Comparatively.

The 2004 system was one where the costs of making the loan, coupled with the repayment threshold and the write off, were not especially problematic – because it was a loan that most people expected to (and did) pay off.

The problem always was the wedging of a much higher individual contribution from graduates into a system not designed for those purposes. In 2010 ministers expected price competition and for fees to average about £7,000 – on a Treasury estimated RAB charge (ie subsidy) of 28 per cent, they thought they were taking the fee from £3,225 to £5,040.

But they also – partly via the coalition politics of the day – wanted that all to be progressive. Hence conservative minister David Willets was pleased to tell anyone that would listen back in 2010 that “a quarter of graduates – those on the lowest incomes – will pay less overall than they do at present”, although given the headline sticker price rise, it’s not clear that anyone was listening. Especially the gradates at the other end expected to pay much more than they’d borrowed.

The problem with designing a 30 year graduate tax where the only real impact of the interest rate, the principal and the repayment threshold is to determine which lucky few graduates get let off from paying it in their fifties is that it was wedged into loan legislation never designed for huge numbers not paying it off in full.

And that created four huge problems.

The student interest

Every few weeks a post-2012 Plan 2 loan holder on a medical degree goes viral on social media as they complain about their ballooning principal and their “usurious” interest rates – because nobody warned them that for them (and the majority of everyone else) it was always going to be a 30 year graduate tax.

That’s politically deadly – a huge subsidy that actually feels like it’s the opposite.

The next problem was always that a financial instrument designed to kick in a small bit of insurance subsidy for those who ended up not benefitting from HE at all ended up being hugely differential – so the “Plan 2” loan system that really was one that collected much more from the most successful and very little from the least.

It might be progressive, but we tend to only accept that sort of progressivity when it’s done through proper tax, rather than what remains a state-subsidised “loan”.

Initial efforts to reduce the subsidy involved reducing the value of the top-ups – so more of the money that was spent on business studies gets diverted into teaching things that require more people and kit and more of the money that was to be spent on those that are well-off gets spent on those that aren’t. You can cover that for a while via international expansion or franchising, but those bubbles are slow-bursting.

Then efforts by the Treasury via the Department for Education in the last Parliament to further reduce the subsidy by holding down the repayment threshold and extending the loan term to 40 years compound the problem – because to balance the books, you have to estimate the value of earnings and repayments in 40 years’ time, when it’s become hard in recent years to make that guess for six months’ time.

We’re left with almost everyone paying £9,250 fees on a RAB charge estimate of 29 per cent – average effective fees of £6,568. But the wider problem is that when fees were £3,000, almost everyone paid £3,000 and the state differentiated for costs. Now graduates eventually pay something between £0 and 60k (highest earners on four year programmes once you add in the maintenance) – and it appears to bear no relation at all to the costs.

It pushes cross-subsidies to the extreme limits – because what used to feel like everyone making a contribution that the poorest didn’t pay becomes some getting into huge individualised “debt” to pay for other people’s higher education. Add to that the visceral unfairness felt when you can see someone else on campus getting more, and your mate at another university getting even more than that, and you flip from fair to unfair.

And the more we persist with that as a system, the worse that gets.

Maybe some short-term emergency relief is coming, and maybe some tweaks can be built in for a couple of years. But the gordian knot remains.

Is there a way out?

If, for example, the £3,225 fee that the coalition had inherited had risen by inflation, it would now be £5k. IFS reckons that 87 per cent would have paid it off in full. The problem is that if you were to just match the current long-run cost to the exchequer, you’d only be putting in £1,900 per student in grant funding. Nobody thinks that’s enough. And so if you really do want to be bold, you end up with three options.

Option 1 is that you make less successful graduates pay more. That very much shifts us in the direction of a loan – people understand the idea that you “pay off” a loan. But to cover the necessary costs, that involves quite a bit of pain for early career graduates – because that’s where the bulk of the losses are concentrated.

Option 2 is that you make more successful graduates pay more. That very much shifts us to tax territory – but it really would have to be a dedicated tax rather than a loan, for all the reasons we’ve become familiar with (principally that doing it via loans means Labour would have to put hated interest rates back up).

And neither of the above deal with the enormous cross-subsidy issues, and the complete lack of influence that the state has over who studies what, and where.

Tweaks like shorter courses and promoting more students studying locally would be just that – they save bits of money but hardly make a dent in the issue at all, and run up against the idea of university that so many have come to aspire to.

I do have a nagging feeling that a student maintenance system that allowed students to reduce study intensity when they needed to and complete at their own pace would reduce student support costs per cohort – I just can’t prove that it would do so sufficiently to make the system substantially more sustainable.

We also shouldn’t rule out business paying its fair share (Johnny’s Rich’s Graduate Employer Levy scheme is not as daft as it sounds), and nor should we rule out things like Slovenia’s tiny employer tax on student jobs that helps fund lower food costs, or the sort of tax breaks seen around around Europe for families helping to fund living costs.

Option 3 – just fund it through general taxation – feels like the sensible third option. But it also feels nigh-on impossible in the current “fiscal climate”, unless you prize the feelings of a med graduate on X over the plight of a family whose school is literally collapsing.

So on the assumption that we end up, again, with a messy fudge of all three options that somehow hangs together, I think there’s at least some principles that Jacqui Smith ought to hold on to.

Principles not principals

First, if she tells students that once they gain admission they’ll be able to cover their living costs – albeit with a reasonable amount of part-time work for some – that has to be actually true.

At the moment the sector lies to protect unfettered places – that brings similar shaped moral hazards as the see-saw being tipped in the other direction where everyone can eat but places are restricted. But, you know, everyone would be able to eat.

Next, the government obviously should inch back towards the idea of a funding system that covers the basics and taxation-funded state top ups to cover high cost students. Both fairness and perceptions of it depend on the principle.

If it is the case that while waiting for all of this to be wrestled with, survival depends on making internal cuts, there needs to be a level of honesty with students about that. The gaslighting that providers perfected during the pandemic was one thing – but pretending that all that is on offer now can still be on offer in 4 years’ time is just lying.

If commitments under consumer law can’t be met, and if the practical implications of the B Conditions can’t be delivered on the fee that’s allowed to be charged, the very worst thing would be for all the grown ups to pretend that they can and they can – literally depending on students’ lack of confidence to complain as a risk mitigation strategy.

But then finally, in that big review that’s coming, I think the government will almost certainly have to inch towards differentiation in the student and graduate contribution by subject and institution-type to cover those basics. A student on a foundation degree in a franchised, for-profit provider should no more be paying £9,250 when their provider pockets half of it than a medical student pays £9,250 when most of their families have been paying £20,000 in school fees while earning millions over their lifetimes.

And yes, I know, the differential costs of teaching don’t neatly map onto the differential earnings they might expect to enjoy by subject, and yes I know that it would be hard to suddenly go all European with “universities”, “applied universities” and “specialists” as categories, and yes I know that “fear of debt” may end up causing students to not pursue the subject they should. And I’d rather that fees weren’t there at all.

But a system where home students are enticed onto Business Studies foundation degrees at for-profit providers who will barely pay (or subsequently earn) a penny, rubbing shoulders with those from the global south in intolerable debt to pay for them isn’t one that has a meaningful or moral future.

As it stands, the closest I think that Smith might be able to get to fairness runs like this:

Your subject at your provider type costs X to teach. The state and the student will put in consistent percentages each. We’ll loan you enough money to live on and, within reason, allow you to go at your own pace. And if we honestly don’t think that your subject at your provider type will lead to you being able to earn enough to cover your chunk, we’ll restrict places rather than sending in the bailiffs or destroying your twenties.

It will need a big and detailed review to test the implications of all of that. But it would feel fairer, be more honest, and be the least worst thing for the minister to do next.