As was widely predicted, the leaked Labour manifesto confirms that the party intends to abolish tuition fees, and cover the costs through general taxation; specifically, an increase in corporation tax.
The current system of English student support and university funding costs the Exchequer approximately £5.741 billion per cohort of students (i.e. first year undergraduate students from England studying at Higher Education Institutions (HEIs) anywhere in the UK, and EU students enrolled at English HEIs throughout the course of their studies). This amount includes £1.772 billion to cover the interest rate and write-off subsidies associated with full-time maintenance loans (31% of the total), £2.579 billion to cover full-time tuition fee loans (45%), £0.494 billion to cover part-time fee loans (9%), and £0.877 billion in HEFCE teaching grant funding paid directly to HEIs to cover the additional costs associated with high cost subjects (15% of total for both full-time and part-time study).
Table 1: Current public HE finance costs
| Funding item | Full-time students | Part-time students | Total |
|---|---|---|---|
| Tuition fee loan | (£2,597m) | (£494m) | (£3,092m) |
| Maintenance loan | (£1,772m) | £0m | (£1,772m) |
| Maintenance grant | £0m | £0m | £0m |
| HEFCE teaching grant | (£787m) | (£89m) | (£877m) |
| Total | (£5,157m) | (£584m) | (£5,741m) |
Labour’s pledge to drop tuition fees
Without comparable Exchequer funding, abolishing tuition fees (for English-domiciled students and EU students studying in England) would result in HEIs losing approximately £11.776 billion in tuition fee income per cohort of students. To ensure that English HEIs are no worse off under the arrangements, the loss of tuition fee income needs to be made up by increasing the HEFCE teaching grant funding paid to HEIs.
Implementing this option will not cost the full £11.776 billion, for three reasons:
- First, the Exchequer is already paying approximately 27% of the total tuition fee through interest rate subsidies and write-offs (captured by the RAB charge, which is the proportion of the face value of the loan never repaid).
- Secondly, there is a further bonus relating to these subsidies: abolishing fees and the associated fee loans offered to students also has the effect of reducing the RAB charge (to 12%), as graduates will end up paying off more of their maintenance loans than previously the case (assuming the same earnings post-graduation).
- Finally, HEFCE teaching grant funding is only paid to English institutions, while HEIs in other Home Nations will not benefit from the additional teaching funding.
The impact of the reduction in the RAB charge following the abolition of fees, combined with their replacement by enhanced HEFCE teaching funding, results in an increased overall cost to the Exchequer of £7.527 billion per cohort.
The total public cost under the Labour manifesto proposals would now be made up of £1,047 billion to cover the interest rate and write-offs associated with full-time maintenance loans (8% of total), and £12.221 billion in teaching grant funding (92% of total).
Table 2: Public costs of Labour’s manifesto to drop tuition fees
| Funding item | Full-time students | Part-time students | Total | Difference to current system |
|---|---|---|---|---|
| Tuition fee loan | £0m | £0m | £0m | £3,092m |
| Maintenance loan | (£1,047m) | £0m | (£1,047m) | £725m |
| Maintenance grant | £0m | £0m | £0m | £0m |
| HEFCE teaching grant | (£10,686m) | (£1,535m) | (£12,221m) | (£11,344m) |
| Total | (£11,733m) | (£1,535m) | (£13,268m) | (£7,527m) |
What about maintenance grants?
Controversially, in 2016-17, full-time maintenance grants were removed by the government and replaced with increased maintenance loans. Re-introducing these grants at the previous levels would result in additional Exchequer costs of £1.868 billion per cohort, however, this would be offset by £333 million per cohort saving associated with the reduced maintenance loans issued (and a reduced RAB charge). The overall cost of the re-introduction of maintenance grants for full-time students was estimated to be £1.536 billion per cohort – resulting in a total Exchequer cost of £9.062 billion per cohort associated with the manifesto proposals.
Table 3: Public costs of Labour’s manifesto to drop tuition fees – and re-introduce maintenance grants
| Funding item | Full-time students | Part-time students | Total | Difference to current system |
|---|---|---|---|---|
| Tuition fee loan | £0m | £0m | £0m | £3,092m |
| Maintenance loan | (£715m) | £0m | (£715m) | £1,058m |
| Maintenance grant | (£1,868m) | £0m | (£1,868m) | (£1,868m) |
| HEFCE teaching grant | (£10,686m) | (£1,535m) | (£12,221m) | (£11,344m) |
| Total | (£13,269m) | (£1,535m) | (£14,803m) | (£9,062m) |
Is the proposed increase in public funding good or bad?
Education is one of the strongest determinants of long term economic growth, so additional funding for higher education is potentially a positive move. However, the real question is whether this potential funding could be used more effectively, for instance, to improve access, continuation rates and other outcome measures?
Abolishing tuition fees shifts the cost burden from graduates to the Exchequer, and results in many students that do not need this proposed level of support receiving a substantial boost from the general taxpayer. This is inefficient in an economic sense.
Interestingly, this proposed approach runs in the opposite direction of the decisions made recently by the Labour and Liberal Democrat government in Wales as part of the Diamond Review, where the non-means tested tuition fee grant was replaced by loans – but the subsequent savings were ploughed into providing generous maintenance support for those students originating form less well-off households. In other words, Wales has moved from un-targeted to targeted student support, while the opposite is being proposed in Labour’s manifesto.
It is worth noting that in Wales, the Diamond Review recommendations were welcomed by all the major stakeholders in the HE sector, which is probably the first time the thorny issue of higher education funding has been adequately addressed. Labour can expect no such kindness from the English sector with its latest proposals to abolish tuition fees.
Note: All values in the tables relate to students starting undergraduate qualifications in the 2016/17 academic year, including both English-domiciled students studying at HEIs across the UK, as well as EU-domiciled students studying at HEIs in England. HEFCE teaching grant funding includes the mainstream allocation for high-cost subjects, as well as he targeted allocations for very high-cost STEM subjects; part-time students; and students attending courses in London. Source: London Economics’ analysis
It’s an interesting scenario. Legislation to abolish fees would mean a second round of HE debates in the House of Lords. Students starting this September might rather resent the £9,250 bil and push for deferral. The OFS’s £13 billion teaching grant budget would make it a bit of a target in future spending reviews – almost as much as the total 16-18, adult education and apprenticeship revenue budgets combined (even with the promised return of EMAs and doubling in adult education spending). Someone might ask whether it really costs £9,250 per student and why this is double the average sixth form rate. Some universities might also fall foul of the 20/1 pay ratio for public contracts – also in the draft. Manifestos don’t necessarily win elections for opposition parties but they sometimes suggest ideas for future governments to follow
Is it really likely that unelected Lords would vote against the abolition of tuition fees or that the OfS terms of reference would stay exactly the same ? Whatever your views, there are big questions hanging over the current fees and funding system in England. This is why the MillionPlus manifesto calls for the a government review to ensure that the system is sustainable for universities and seen as affordable by students and graduates in the long-term. There are very good reasons to do this – abolition of maintenance grants has increased loan debt for students from poorest households, interest rates on loans are rising, mature student and part-time students have not bought into higher fees – to name just a few, more on my blog http://bit.ly/2rpn1ib
This “per cohort” stuff is misleading and it underplays the true scale of the implications for the taxpayer. At any point in time there are in fact several “cohorts” of students at university, usually three years’ worth: so you should treble the figures given to yield the annual cost of tuition and maintenance if the public purse were providing it. In other words, we’re actually looking at a bill of £27bn, not £9bn, per year. Using the Treasury’s ready reckoner it’s estimated that you can raise this kind of additional sum by increasing the basic rate of income tax by 7p or by adding 7% to corporation tax (though neither estimate takes account of the mitigation effects produced by much higher rates, and therefore you’d probably need to raise them even further, perhaps closer to 10%). Alternatively you could divert £27bn from elsewhere, which is about three-quarters of the defence budget or all that the UK spends on police and justice or transport. Strangely, however, I don’t hear supporters of “free university education” confessing to planning these sorts of dramatic tax hikes or massive cuts elsewhere in public spending to pay for it all, or, indeed, huge reductions in the number of universities, lecturers and students to make this promise a lot more affordable. No wonder they’re so coy about exactly how it’s to be done.
I think abolishing tuition fees would unfairly benefit high earners the most. I think the threshold should be raised for receiving free tuition and there should be a £3000 Grant per capita towards living expenses which would help all parents whatever their circumstances but would not be as costly as abolishing fees altogether