Peter Ainsworth is the Managing Director of Consulting AM and is the author of Universities challenged: funding higher education through a free-market ‘graduate tax’.
On becoming Chancellor, Jeremy Hunt addressed Parliament to set out the scale of challenges faced by the UK and the need for “decisions of eye-watering difficulty” to reduce government debt as a share of the economy.
To soften the blow, and to give grounds for hope that the country still has the potential for prosperity, he set out its strengths. Top of the list was higher education, stating that we have “three of the world’s top ten best universities.”
However, his predecessor but one, Nadhim Zahawi, when Secretary of State for Education in February 2022, published a policy statement that puts that sector at risk.
It explained that the student loan book would reach half a trillion pounds by 2043, of which the taxpayer would fund 44 per cent so costing an eye-watering £220bn. To get this under some control he announced that the maximum amount that universities could charge in tuition fees would be frozen at £9,250 per annum up to and including 2024/25.
This level was first set in 2017, so each year since then its real value has been eroded as the general price level has risen.
The Russell Group of universities cried foul, claiming that, given present high rates of inflation, universities would lose £4,000 for each undergraduate student by 2024/25 and that these proposals threatened universities’ future financial sustainability.
While not yet law, the policy statement is probably one of those eye-wateringly difficult, but necessary, decisions. Letting the student loan book, and associated losses, grow when the primary objective is to lower government debt would not appear to be appropriate.
At the same time, the higher education sector is a source of significant foreign earnings and innovation and needs increasing resources to remain internationally competitive.
In fact, there is a way to square the circle, to save taxpayers £60bn over 20 years, and to give universities access to much greater funding and deliver better career outcomes for students.
The key is to learn from history and simulate an apprenticeship arrangement where pupil and master were partners rather than customer and supplier. This requires universities to enter into risk and income sharing agreements – private income contingent loans – with their students, so that their earnings are based on those of their graduates.
This approach has been growing in popularity in the United States after Purdue University set up a scheme in 2016. Germany has also seen significant growth, with one administrator having 33 universities on its books.
The UK is behind, but in mid-2019 StepEx secured FCA registration to offer risk and income sharing agreements and it now has partnered with 25 technical “bootcamps” as well as Cranfield University, the London Business School, the University of Cambridge’s Judge Business School, Regent’s University and the University of Buckingham.
Earlier this year StudentFinance also gained FCA registration to offer risk and income sharing agreements, so capacity and competition are in place to support expansion of provision to the whole sector.
With such arrangements the interests of student and university are aligned for the long term. The institution has a powerful incentive to ensure that courses are worthwhile and to teach the soft skills necessary for employment, a long-standing request made by companies. Post-graduation support will improve as a graduate earning below the set earnings threshold will now cost the university, not the taxpayer.
The Government’s plan to freeze the student loan amount at £9,250 should go ahead, but the link to tuition fees should be broken. Universities should be free to set fees as they see fit – as they do now for international and post-graduate students. But they must allow students to meet the cost of any excess over the state loan through a risk and income sharing agreement.
The policy statement creates the perfect environment for the sector to learn how to wean itself off taxpayers’ money. The Government loan amount creates a secure funding stream while they explore what, in addition, can be raised through direct contracts with students. The freeze can then be extended indefinitely so that gradually universities stand on their own two feet and can be freed of much burdensome regulation.
Although the overall notional cost to students goes up, they only pay the additional amount if their earnings justify it and, in any case, students from 2012 onwards paid much more in real terms and were not discouraged. Where students gain is in having an institution sharing in their success and so determined to support them in any way it can.
As Hunt said, “growth requires stability”. That calls for the higher education sector to reduce its dependence on what has historically been quite capricious government funding decisions. This scheme has the extraordinary merit of reducing the long-term burden on the taxpayer, while actually increasing resources available to the sector to enable it to do a great job and compete internationally.
Students are the biggest winners. The university will become their partner, having their interests at the heart of everything they do, as both now share in graduate’s career success.