No more illusions- the economics of post-school education

You will remember Tony Blair’s announcement in 1999 that he wanted 50% of young people going into higher education. This is now the case, with the proportion of young people entering higher education increasing from 40% to 50% during the 21st century.

This growth has come almost entirely from more students enrolling on to full-time undergraduate degree programmes at universities. Has this been in the best interests of students? And given this expansion has been funded in large part through an accounting trick by the Government, more of which later, has the cost been in the best interests of taxpayers? The House of Lords Economic Affairs Committee, which I chair, has just concluded a year-long inquiry addressing these questions and was unanimous in its conclusions.

Other models

Higher education should not just about spending three years at university studying for a degree. There are thousands of technical and vocational qualifications which can be studied in higher education institutions and further education colleges, either full-time, part-time or as part of an apprenticeship. We need greater diversity and much more choice in the system.

The evidence we heard suggested that there is a paradox in the labour market: there are shortages of workers with higher level technical qualifications but there are lots of graduates doing jobs in which their learning has no application. For these people, a technical or vocational qualification, relevant to the workplace, may have helped them secure a more satisfying job and left them with less student debt.

Demand for these other options in higher education is low: the qualifications are perceived as inferior by students and parents; schools are incentivised to push students towards sixth form and university, employers are increasingly using degrees as a filtering mechanism when recruiting for jobs, regardless of the level of skill the job actually demands.

How do we alter perceptions?

The main answer looks to be funding. The system for higher education is skewed heavily towards full-time undergraduate degrees. Students across the whole of higher education should be able to access loan funding and maintenance support for all full-time and part-time courses. We also need to address urgently the decline in part-time higher education where there has been a 60 per cent fall since 2010. This appears largely to be a result of the increase in tuition fees in 2012. It’s a worrying trend at a time when people are expected to have several careers throughout their lifetime. We want to make it easier to access funding for individual modules which, with the introduction of a proper credit-based system, would allow people to work their way towards a higher-level qualification at their own pace in an affordable manner.

The true cost of sending ever increasing numbers of young people to university is masked by the treatment of the student loans in the national accounts. When higher education was reformed in 2012, overall funding increased by £3bn but with higher tuition fees and student loans replacing direct grants, George Osborne was able to record a reduction in the deficit of £3.8bn. This magic money tree has a lifecycle of over 30 years: around £16bn was lent by the Government to the 2017/18 cohort of students, it is estimated that almost half of this will never be paid back but these write-offs will only show up in the deficit at the end of the loan term which is 30 years after graduation. This generation of students who are graduating with around £50,000 of debt will therefore be hit twice: they will be the taxpayers in the 2040s and 50s who a future government will have to ask to foot the eventual bill (by this point the total student loan book will be worth £1.2 trillion in nominal terms).

The outrageously high interest rate on student loans (which will be 6.3 per cent from September) is also part of this accounting trick: even though 83 per cent of students will never pay off the interest on their student loans, the Government counts the accrued interest as income, which reduces the deficit, from the year the loans are made. For 2021/22, the accrued interest on student loans is expected to be worth £7.5bn, a significant sum to count as income when the forecast deficit will be £21.4bn. The Office for Budget Responsibility has referred to this as a “fiscal illusion”.

Now you see it…

These illusions and tricks have to end: the expected losses on student loans must be recognised in the deficit today. This would allow for an informed debate on where public funding in post-school education is best spent: we recommend more funding for further education, an important route into higher education for those who do not pursue the academic route. Such a debate could take into account the restoration of means-tested grants, which when talking directly to students we found was their biggest demand.

Our report is an appeal to the Government to treat students fairly by ensuring equal treatment and sustainable funding for all forms of higher education. This would benefit the economy and society by ensuring that we develop the skills we need and allowing young people to maximise their potential.

The cross-party committee, with former Chancellors, Permanent Secretaries to the Treasury and leading business figures as members, received evidence from over 150 experts and organisations during its inquiry.

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One response to “No more illusions- the economics of post-school education

  1. The Browne Review was only 64 pages long, had just seven panel members, and reached its conclusions in less than a year. The Dearing Report of 1997 took 14 months, had 11 panel members, and is 366 pages long. The Robbins Report of 1963 took two-and-a-half years, had 13 panel members (one of whom died during the process) and is 260 pages in length.

    The adage ‘reap what you sow’ has never been more apposite. The Browne review relied on competition without appreciating what outcomes rational economic behaviour by universities and students would result in.

    eg the (global) phenomenon of homegenity:

    ‘Competition for scarce resources causes institutions to become more similar because the uniform environmental conditions of competition bring forth similar responses.’ (Zha, ‘Diversification or Homogenization in Higher Education’, Journal of Higher Education in Europe, 2009).

    eg £9k fees:

    An inevitable and eminently forseeable consequence of the loan system (monthly repayment the same whatever the fee, quality signalling, what needed to be charged to cope with worst case scenarios should demand fall by 20-25% after the replacement of a certain with an uncertain income stream).

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