We need an alternative to human capital theory as a basis for university funding

Students are being “ripped off” by a tuition fees system that encourages “Mickey Mouse” degrees, according to a “new” report from the Centre for Policy Studies (CPS).

In the report (and in reports about the report), universities are accused of being focused on “increasing numbers of students” rather than “improving the quality of degrees” – and so it says student loans should be overhauled to encourage universities to offer degrees that “help their students land better-paid jobs when they leave” instead of “subsidising creative arts degrees.”

And how would this work?

Universities should in future hand out student loans themselves, rather than the government, using cash lent by Whitehall. At the end of their studies, students would repay their loans to their universities, making the institutions responsible for any shortfall from defaults. The CPS believes the changes would push universities to focus on science, technology, engineering and mathematics (STEM) courses that reward students with better pay once they get a job after their studies.

If that all sounds familiar, that’s probably because it is very familiar. Like the graduate tax, the financialisation of the system via (almost) individual graduate bonds is an idea that reappears every few years, is trashed each time and yet refuses to die – like the cockroach of higher education policy. Let’s re-familiarise ourselves with it, shall we?

You do it to yourself, you do

Imagine for a minute that you were advising an investment company on who to give student loans to on the basis that the company making the loan will get a proportion of that student’s lifetime earnings.

To maximise your investment, what would you take into account? University? Course? Student characteristics and background? See any downsides yet?

OK, now imagine that it wasn’t you giving the advice – but instead someone who was only thinking about economic returns. See any downsides now?

When you compare what is currently happening in universities with what might be invested in on these terms, you set up a “problem” which by now should be familiar. The university sector has expanded hugely in recent decades. 20 percent of undergraduates will be poorer as a result of choosing HE. There is significant variation by course, subject and gender. Our current system leaves students heavily indebted. It leaves the taxpayer out of pocket. And so on.

Imagine if I framed my question as “who needs investment the most” or “which bits of the economy need a subsidy for a while because their activity matters to us a society”. Different results. But wrong frame.

Part of the problem here is that when the sector agreed to students being loaned a big figure that covered the costs of some courses and was less than the cost of others, had no limits on who was allowed to get one of these vouchers, and a system made progressive by making repayment income-contingent, it opened up endless circular debates – about “large debts” that aren’t as large as they look, incentivising “too many” places on some courses, and the “returns” to graduates and the taxpayer.

And as I’ve said before on here, if you want a subsidy that people will be grateful for, you ideally don’t want it to only manifest at the other end of their life if they’re economically unsuccessful in the interim.

Elsewhere on the site DK looks at the £8.5k thing – because even a small reduction in the principal can look good if you’ve somehow convinced people that your tripling of tuition fees meant a tripling of the graduate contribution. But what of the other factors?

Blue ab a di a ba da

A month or so ago in response to the FT’s story on lowering the graduate repayment threshold, Bright Blue’s Ryan Shorthouse argued that doing so would hit young graduates on starting salaries, reducing their net pay at a time when they need as much disposable income as possible.

He should know – it’s his intervention into the post-mortem surrounding Theresa May’s poor showing at the 2017 snap election that it is rumoured led to both the raising of the threshold and the calling of the Augar review in May’s “British Dream” speech to party conference that year.

In an earlier guise back in 2010, just as everyone was debating whether to implement the Browne review of higher education funding and student finance, Shorthouse was a research fellow at the Social Market Foundation, and one of the co-authors of a paper that called for new funding model which was to take two existing proposals – tuition fees and a graduate tax – to build a system that would create a fair market for students and universities alike.

Graduates were to pay a financial contribution through the Student Loans Company at a rate and above an income threshold set by government (as we have now), and graduates’ contributions were to cease after 25 years. But to secure loans (ie places), universities were going to have to demonstrate that their graduates’ earnings profiles were such that they could expect contributions sufficient to repay the principal to government with interest.

Alliance with me

In many ways the proposal built on thinking that had been done by part of the sector itself. Back in April of 2010, the University Alliance had proposed that with real interest rates to cover the full cost of borrowing (including the cost of any subsidies), a reformed Student Loans Company would sell student loan bonds to private buyers raising upfront private finance to deal with upfront cash-flow costs – although it had argued that private buyers could would be able to purchase a proportion of the total portfolio but would not be able to “cherry pick” particular groups of graduates.

In other words the Alliance had proposed the human capital bit but argued the risk should be dissipated via interest rates and terms and conditions; the SMF proposed state investment and to control the risk by controlling the supply of places via university earnings profiles.

Neither report attracted much attention at the time, but the ideas lingered on into 2011 when Tim Leunig joined CentreForum from the London School of Economics, and published a paper called “Universities challenged: making the new university system work for students and taxpayers”.

In that paper (in a context, remember, when student number controls were still around) Leunig argued that government would use SLC data to establish the likely loss to the government of lending money to students at different institutions and on various courses – a course (subject?) and provider-level RAB charge.

Universities were then be asked to make “sealed bids” for places on certain courses and declare the tuition fee that they wanted to charge. Those considered to represent “best value” to the Treasury would get the allocation requested.

In the end, partly because the “fiscal illusion” at the time encouraged it, the cap on places was just taken off by George Osborne. But that didn’t stop the ideas from developing further – and in 2012, then universities minister David Willetts had set out something of a dream:

Imagine that in the future we discover that the RAB charge [non-repayment rate] for a Bristol graduate was 10 per cent. Maybe some other university … we are only going to get 60 per cent back. Going beyond that it becomes an interesting question, to what extent you can incentivise universities to lower their own RAB charges.

Student bonding

In 2013, a proposal in another CentreForum publication used the idea of that course and provider-level RAB calc as the basis for a proposal to issue “certificates” of debt, which were to guarantee repayment plus interest at a later date, as a way to source money from financial markets for loans for postgrads. These “human bonds” – advocated in an article by the Joel Mullan and developed by Jon Wakeford from university estates company UPP – was to have seen groups of universities, perhaps based on mission group or geography, issue those bonds.

So enamoured by the idea was universities minister David Willetts that it emerged in 2014 that he’d commissioned research on the concept of universities taking on some of the risk that their own students repay less of their student debt than expected. He told Newsnight at the time:

Why not give universities that wish it the opportunity of holding the loans belonging to their own graduates?… So suddenly there’s a direct connection between the university and the graduate.”

Although then Newsnight policy editor Chris Cook noted that the idea would require careful design to avoid unwanted consequences:

For example, the easiest way to cut loan defaults would be to admit fewer women and students from poorer families, since both groups tend to have lower lifetime earnings. Care would need to be taken to protect academic integrity; the process could spur grade inflation.”

At the time Willetts concluded that the idea wasn’t deliverable because government IT systems wouldn’t cope – and the law would have to be amended to allow universities to share information about their graduates with the relevant agencies with proper consent.

But the law did change, and the IT did develop – and as part of that debate, the first version of what we now know as the longitudinal educational outcomes (LEO) dataset was commissioned. And since then, the idea of human graduate bonds has repeatedly re-emerged, masquerading as original thinking each time.

It never goes away

Publicly, the main (official) uses of LEO have been to fuel public information about prospects to aid student consumer choice, and to fuel press stories and the odd think-tank report about Mickey Mouse courses and poor graduate returns. But there’s been a lingering suspicion that a government that abandoned calculating the income and expenditure profile of students back in 2015 on the basis of cost, but has continued calculating the LEO dataset, has long harbored bigger ambitions for its uses and abuses.

In 2017, in a report whose foreword was written by none other than disgraced Owen Paterson MP, Brexit/Reform party campaigner Richard Tice proposed a “National Student Bond” as a way to finance student loans, where interest was to be paid by universities to encourage them to be more efficient with the funds they received, offer better-value courses and administer the public’s money more effectively.

And now here we are again, with the CPS version of the wheeze:

• Because current provision represents a “misalignment of risk and reward”, the government will loan funding to universities, and students would then repay their universities, which would repay the government. Government would state what proportion of the loan extended to the universities it expected to be repaid.
• Universities would then have to make repayment arrangements with their students that would achieve the repayment rate demanded by the government, based on the estimated lifetime earnings trajectory for their graduates.
• There would be a cap on the amount an individual student can be expected to repay, in order to prevent universities using a small number of high earners to subsidise the rest of the cohort. That, after all, would repeat the mistakes of the current system by “luring” school-leavers to low-earning, low-returning courses and away from more productive alternative education, training or employment.
• Nonetheless, an element of “risk-sharing” among the cohort will remain, both because it’s efficient to pool risk even among high earners, and to enable the universities to continue to offer subjects outside the very high earning.

Set aside for a minute the obvious objections on the grounds of a dystopian view of what society “values”, the distortive impacts of where graduates end up in the country geographically, the idea that one day we’ll be worried about “sub-prime graduates” and the way in which universities would be incentivised to “de-risk” by abandoning widening participation work on the basis that such students are more likely to have worse labour market outcomes.

And set aside that the proposals are completely unworkable, would make no sense in a UK-wide kind of way, wouldn’t work in the way the author thinks they would and would be unlikely to get through Parliament. None of those things are the point. It’s the frame that matters here.

Strike for the root

As Andrew McGettigan warned us back in 2015, once play along with (and cheerlead on) a few years of financialisation and human capital theory as your justification for investment in HE in general, the growing and unexpectedly large subsidy built into the fee-loan regime becomes a “problem” to be “solved” – the government not getting the maximum it could or should be from borrowers or from universities:

One might blame universities that set fees for classroom subjects at the same rate as lab-based subjects, that blanket £9 000 per annum, or loan funding offered for subjects that do nothing to boost graduate productivity. Either way, it points to the issue of mis-investment rather than underinvestment. Indeed, given the statistics on graduates filling posts that do not require graduate qualifications, from the human capital theory perspective, one might even use the language of overinvestment in HE.

And then he laid out what would happen next:

The first step here is the likely freezing of the repayment threshold for the latest loans at £21,000 after 2016. As graduate earnings rise in the following years, ‘fiscal drag’ would generate more repayments and address immediate concerns about the ‘sustainability’ and ‘generosity’ of repayment terms. Graduates though would be paying more than they would have anticipated in 2012.

That the intervention of Ryan Shorthouse and Theresa May temporarily interrupted that trajectory in 2017 is barely the point – as the government and its Treasury prepare to use the review she commissioned as cover to impose the repayment threshold it always wanted to.

McGettigan argued that the coming wave of “education evaluation” threatened to supplant traditional understandings of universities as communities advancing public knowledge:

I have no glib solution to which you might sign up. But when hard times find us, criticism must strike for the root: the root is undergraduate study as a stratified, unequal, positional good dominating future opportunities and outcomes. What might find broader public support is a vision of higher education institutions that are civic and open to lifelong participation, instead of places beholden to the three-year, full-time degree leveraged on loans and aiming to cream off ‘talent’.

The sector may yet live to regret failing to heed his advice. But while the cockroach reappears, the status quo as the argument against is unlikely to suffice either. The fact is that we do have a system that looks like debt; we do have a system that incentivises the staging of cheap to teach provision and then pretends that it’s rationed to get students to sign up to it so their vouchers will subsidise others; and we do take people out of their communities on a boarding school model in a way that is unhelpfully bifurcating the country. If the sector is unable to devise the kind of restraint and change that is required to deal with these issues all on its own, it shouldn’t be surprised if the frame used to do it for it is that of the Centre for Policy Studies.