Of mice and May: the huge risk posed by variable tuition fees

I was reminded this week, when reading about the new River Nile dam, of the book Rule of Experts by the political theorist Timothy Mitchell.

In a series of essays about Egypt, Mitchell reveals how various complex and unpredictable factors make it impossible for economists and social planners to fully understand and predict reality, like in the failure to foresee a terrible malaria epidemic that became an unintended consequence of building the Aswan Dam.

A central argument in Rule of Experts is that markets and economies fail, as they did in Egypt in 2000 because people and planet do not behave as neatly as they might in either rational-choice models or computer simulations.

Tuition fees are an exemplar of the problem that Mitchell identifies. In 2012, there were those in government who expected to see fee competition between institutions. Instead, institutions behaved counter to this market logic and raced to the £9k cap to ensure financial stability, reduce the comparative advantage of other institutions, and avoid the trap of a lower price signalling lower quality to prospective students. Cries of “cartel” were soon voiced by libertarian think tanks and right-wing columnists – “the market couldn’t possibly be wrong: it must be universities colluding!” – only for the Office for Fair Trading to find no evidence of anti-competitive behaviour. Let’s also not forget the complete failure to predict (or mitigate) the collapse of part-time and continuing education because of a mixture of supply- and demand-side factors created by the introduction of £9k fees.

Market failure

After 2015, the Government had shown they’d largely given up on the neoliberal ideal that market competition could somehow raise standards when they stated their intention to link fees to the outcomes of a bureaucratic exercise of assessing teaching and student outcomes, something right-wing think-tanks like the Institute of Economic Affairs consider positively Stalinist.

The post-18 review is now, in many ways, the complete acceptance of defeat. In the PM’s own words, ‘the competitive market between universities which the system of variable tuition fees envisaged has simply not emerged’. Her solution: if the market won’t help, we’ll just create fee differentiation by fiat. And, thus, the debate over variable tuition fees is reignited but set in a context that presupposes significant Government intervention based on their own preconceptions about degree “value” and how to measure it.

But if having two fee caps was complicated and unpredictable, there’s an awful lot that could go wrong with an even more convoluted scheme where subject, quality, outcomes and access could all feed into the course fee. In HEPI’s recent report on variable fees, Nick Hillman summarised the problem when he wrote ‘[w]hat initially seems like a solvable economic question quickly becomes a tricky political one’.  

Four priorities for the post-18 review panel

We return, then, to Mitchell’s problem of where the ‘intentional or human is always somewhat overrun by the unintended’. What are some of the potential unintended consequences of bringing in variable fees? Here are four that Philip Augar and his esteemed panel members ought to consider.

1) Institutional behaviour and narrowing of choice

Consumer choice was one of the argued benefits of market competition and remains one of the key pillars of the post-18 review. But it is also one of the features of higher education threatened by variable fees.

Institutions recently had to respond to the news that they wouldn’t receive an inflationary uplift in fees for 2018-19. It will have put many budget projections out of kilter by millions, forced new projects to be shelved, and driven cuts in order to maintain cash surplus targets. Variable fees would create even greater financial uncertainties. Income will become harder to predict in the future, contingency funds will need to be larger, greater risks will have to be mitigated.

All this puts greater pressure on maintaining courses and departments where costs could outstrip income. Even under the current system, we have seen the closure or downsizing of many modern language departments, the study of law becoming more concentrated in more selective institutions, and the breadth of course options in other arts and humanities subjects being trimmed down. Without additional revenue to support more vulnerable subjects, we could face a further narrowing of provision.

Variable fees will do nothing to turn around the decline in part-time provision either. We already know that institutions flocked to the safety of the full-time undergraduate degree to benefit from higher fees and lower cost of provision. Such cost-saving is likely to continue. Of course, if you increase part-time fees and you decrease demand, particularly among mature learners, as we saw after 2012. Significant direct investment is needed to make part-time more affordable to provide and, indeed, more affordable to study.

2) Perverse “consumer” behaviour

We don’t know how prospective students will respond to variable fees. Some people will be price sensitive, others will be value sensitive, others still quality sensitive. Most students will consider all three of these factors but not give equal weight to them. And some students won’t really consider any of these factors.

As of yet, students have had little choice over price, so we don’t really know how students will respond. It is likely that responses will not be uniform. Some students with sensitivities to price (and what is likely to be driving this: a sensitivity to student debt) may choose different courses on the basis that their sticker price is cheaper. This is particularly problematic if these sensitivities are correlated with characteristics such as social class, gender, age, or ethnicity. Studies by UUK and NUS both suggest that black and minority ethnic students are more debt averse. If this is the case, variable fees may encourage behaviour that is at odds with fair access.

Conversely, other students may believe that higher price means a better-quality degree and a better investment and may, therefore, flock to more expensive courses. This could have all kinds of effects on student recruitment and lead institutions to make hasty decisions about departments and courses that have poor student recruitment one year, feeding into the threat of limiting choice.

3) Oversupply and falling value of degrees

Institutions could respond to variable fees by expanding the places available in subjects where fee levels are highest. Equally, as explained above, the prestige effect of more expensive courses may also drive up demand for them.

Ultimately this seems to fulfil the Government’s desire to get more students into degrees that they consider having a higher economic value and, therefore, better value for money to the taxpayer. But by encouraging this you risk degrading the value of these so-called “high-value” degrees by creating an oversupply of graduates who will then have ended up paying a premium for outcomes that never actually materialise.

Take economics as an example. The high average salaries for economics graduates stem partly from the proportion who are employed in top financial sector jobs. However, the variance in economics graduate salaries is very large; there are plenty of graduates who don’t end up earning oodles in the City. The economy won’t suddenly create lots more highly-paid jobs for economics graduates to go into, so increasing the supply of economics graduates will only create more competition for the top jobs while sending more graduates into lower paid jobs, resulting in a decline in the average salaries of economics graduates.

The result of this scenario is diminishing average returns in certain subjects due to oversupply, leading eventually, one assumes, to the fees going down. In the meantime, there will be lots of graduates with huge student debts but no graduate salary premium to justify them.

4) Additional course costs and non-academic fees

One of the arguments against the sticker price £9k fee is that it does not represent what institutions are actually spending on a student. There is a huge amount of cross-subsidy between departments which remains largely unseen by the student. Fee revenue also pays for all the professional services that support a student at a university, whether they use them regularly or not. Additionally, institutions generate surpluses from tuition fees to shore up finances against future revenue losses, to use for capital infrastructure and future expansion, or to pay off interest on the debt.

Cost of provision ought to take all of the above costs into account. But with the Government looking to reduce fee costs, variable fees are unlikely to generate the revenue required to effectively cross-subsidise all university operations.

This issue, combined with uncertainty over income levels, may lead institutions to start charging for more services. In Australia, where government-supported course fees are regulated by different bands depending on the subject, institutions supplement their income by charging a ‘Student Services and Amenities Fee’. Similar ‘Student Contribution Fees’ are charged in Ireland. Many UK universities already charge additional “bench” fees to cover the cost of materials, equipment and other consumables.

With consumer rights legislation, institutions are required to state up-front any additional charges a student is likely to incur. This does not, however, stop institutions from charging them. Expect variable fees to inflict a stingier approach by some institutions. A subject may end up with a low tuition fee but after adding on all the extras, it may cost just as much, or even more. Some arts degrees, for instance, may only be able to continue if students pay higher “bench fees” for costly materials and equipment. Alternatively, institutions may simply begin rationing the provision of some services or even ceasing them altogether.

Conclusion: a more uncertain, more unfair system

A system that manufactures fee levels using complex, inconsistent and incomplete information, largely based on exogenous factors, is very likely to produce a catalogue of injustices and unintended consequences that will negatively affect students in years to come.

I have written before of the problems with using historical graduate labour market information to inform prospective students. Using it to, in part, calculate fees is particularly problematic. The risks that the graduate premium may fluctuate, or even disappear in a subject in the future, are considerable. Higher education cannot protect people from changes in the labour market due to global economic forces or political intervention and they cannot correct all the problems inherited from a student’s social background and schooling. Why, then, does the Government expect variable fees to be anything but a complicated mess?

If variable fees affect student or institutional behaviour in any of the ways listed about, the damaging impact in some cases, particularly in terms of departmental closures and narrowing of provision, may be extremely difficult to reverse.

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One response to “Of mice and May: the huge risk posed by variable tuition fees

  1. ‘In HEPI’s recent report on variable fees, Nick Hillman summarised the problem when he wrote ‘[w]hat initially seems like a solvable economic question quickly becomes a tricky political one’.

    Hillman’s report presents a balanced discussion and appraisal of the differential fees option. His conclusion in full appears below and explains the role played by political choice.

    http://www.hepi.ac.uk/wp-content/uploads/2018/02/HEPI-Differential-tuition-fees-Horses-for-courses-Report-104_FINAL.pdf

    Conclusion
    It is possible, if the proponents of variable pricing are to be
    believed, that having different fees for different courses and /
    or different institutions could:
    • send welcome signals about the value of different options;
    • drive extra resources to urgent priority areas;
    • support disadvantaged students;
    • encourage people to enter certain professions; or
    • protect the diversity of the higher education sector.

    But we have been debating differential fees for at least 20
    years, since the Dearing report came out, and countries with
    differential fees face issues that the UK has not had to face, such
    as who, which institutions and what to favour when pricing
    courses. What initially seems like a solvable economic question
    quickly becomes a tricky political one.
    Moreover, in one important respect, we already have differential
    fees even for undergraduate courses subject to the fixed fee cap,
    but at the back end. This is because in income-contingent loan
    systems the amount you repay differs considerably depending
    on your earnings after graduation.

    It is also clear that the problems the backers of differential
    fees want to resolve, such as insufficient resources for more
    expensive-to-teach subjects or the lack of labour market
    planning, can be delivered in other ways given sufficient
    resources and political will.

    Differential fees can operate effectively and sustainably, as
    proven by experience in other countries, but it is not clear that
    they solve the problems their many different advocates claim.
    So the arguments for and against differential fees are likely to
    continue. But, if the higher education sector is serious about
    maintaining direct public subsidy through a growing teaching
    grant administered through the Office for Students, then
    lobbying for differential fees risks pulling the rug under its own
    arguments.

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