IFS
FUNDING HIGHER EDUCATION
Emla Fitzsimons
Institute for Fiscal Studies
March 2007
OUTLINE
• Funding Higher Education (HE)
– Higher Education Act, 2004
– Public-Private Contributions
• Reasons for State Intervention – Efficiency
• Impacts of reforms on
– Students
– Graduates
© Institute for Fiscal Studies, 2007
FUNDING HE
12,000
8,000
4,000
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2018
2013
2008
2003
1998
1993
1988
1983
1978
1973
1968
1963
1958
1953
0
1948
£ per student, 2006-07 prices
University funding per student
HIGHER EDUCATION (HE) ACT 2004
Universities facing funding crisis  HE ACT 2004
Pre-reform (2003/04) and new (2006/07) systems compared
“Pre-reform” system
“New” system
Students would pay £1,200 in 2006/07
From 2006/07 students pay £3,000
- Up-front fee
- Deferred fee (subsidised loans)
- Flat fee rate
- Variable fee rate
- Exemptions based on family
- No exemptions
income
- Before 2004/05, no grant
- Up to £2,700 in grants, plus
additional bursaries
Note, repayment of loans:
- 9% of income above £13,925 p.a. (income-contingent)
- zero real interest rate (subsidy)
- debt write-off after 25 years (subsidy)
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FUNDING HE
Introduction of top-up fees in HE ACT a means of
increasing university funding
- Universities gain (£1.2 billion)
- Allows up to 30% increase in spending per head
- Leave scope for bigger fee increases later
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FUNDING
HE
But
raising money
alone is not good argument for fees –
there are other options
Examples of this observed in run-up to election May 2005:
 scrap fees and raise funding for universities through
– scrapping maintenance loan subsidies (Conservatives)
– higher rate tax rise (Lib Democrats)
 Different policies shift balance of funding b/w public and
private contributions for tuition in different ways
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FUNDING HE CONTD.
Compare for example Labour and Conservative proposals:
Taxpayer cost rises (relative to 2003/04 system) under both, but the way in
which this occurs is different:
Labour
Tories
New fee loan subsidies
-830m
0
Introd of £1,500 grant
-440m
-440m
New taxpayer subsidy to unis
0
-1350m
Gifting student loan book
0
-380m
Reduced maint loan subsidies
+80
0
Scrapping maint loan subsidies
0
+820
Taxpayer Costs
Taxpayer Savings
Lab:
Tories:
Net additional
costs
1,190 graduates
1,350
increased
loan
subsidies (benefitting low earning
the most)
increased direct payments to universities (scrapping subsidies, which
harms low earning graduates the most)
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FUNDING HE CONTD.
Graduate contribution rises under both
- Lab:
higher fees (~£800 million)
- Cons:
reduced loan subsidies (~£1.6 billion)
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FUNDING HE: PUBLIC-PRIVATE CONTRIBUTIONS FOR TUITION
Now compare “pre-reform” and new (Labour) systems
Pre-reform system:
Average total public and private contribution to tuition costs amounts to ~£6,000 p.a.
Once fee exemptions are taken into a/c, only around £600, or ~10%
is derived from the up-front fee  contributions skewed heavily towards
the taxpayer
2006-07 system:
Average total public and private contribution to tuition costs ~£7,600 p.a. if all
universities charge full fee (increase of ~30% on average in real terms per head)
Private fee contribution w/o subsidies ~38% of the total;
But once fee loan subsidies taken into a/c, net private contribution
substantial proportion of private fee revenue will still come from
public purse in the form of loan subsidies
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~22%
the
FUNDING HE: PUBLIC-PRIVATE CONTRIBUTIONS FOR
TUITION
Balance b/w public and private costs of tuition
£12,000
£8,000
£4,000
£0
2005-06
public
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2006-07
public loan subsidy
£5,000 fee cap?
private fee contribution
STATE INTERVENTION IN HIGHER EDUCATION
Why might the market alone lead to inefficient
outcomes?
I. Liquidity Constraints
II. Information Problems
III. Uncertainty and Risk Aversion
IV. Externalities
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I. LIQUIDITY CONSTRAINTS
HE requires cash upfront, for fees and living expenses  with perfect capital
markets, borrow and repay out of graduate income
But capital markets are not perfect, due to information asymmetry, risk and
uncertainty…
Student inability to borrow (lenders reluctance to lend) due to
– Lack of collateral (human capital?)
– Asymmetric information - borrower has more information than lender
 expose lender to adverse selection
 risk premium inefficiently high
 inefficiently small amount of borrowing
Student reluctance to borrow due to
– Imperfect information re nature of HE
– High (perceived) risk of failing the degree
– Uncertainty: average private return to a degree is positive but high variance; no
option to sell qualification to make repayments
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II. INFORMATION PROBLEMS
• To make rational decisions, individuals must be perfectly informed
about
– Nature of product – quality of educ [Good Universities Guide?]
– Prices – tuition fees, living expenses, opportunity cost of labour etc.
[provide facts and information via internet, leaflets etc.]
– Future
•
Likely that imperfect information leads to under-consumption, esp by lowest
socio-economic group
•
Stronger argument for centrally planned package at primary and secondary
levels – capacity of younger children to make choices is limited, the case for
uniformity of educational experience stronger
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III. UNCERTAINTY AND RISK AVERSION
Comparing expected and not actual incomes
- More certain income streams may be preferable to less certain
income streams, even if E(Present Value) of latter is higher (closely
related to risk aversion)
Market for insurance fails due to
– Adverse selection
– Moral hazard
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IV. EXTERNALITIES
Education may create benefits to society over and above those that
accrue to the individual alone
i.e. return to education = private return + social return
 Strength of effects difficult to measure
Average private return to HE v non-HE is approx 25-27% for women,
18-21% for men
Note also that financial returns to different degrees vary quite markedly
Do individuals incorporate social return to education in weighing
up PV of benefits and costs?
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EFFICIENCY: RECAP I
Moreover, market failures to do with efficiency may
disproportionately affect individuals from less well-off backgrounds
 All of these arguments can justify govt intervention on efficiency
grounds
But efficiency arguments for intervention do not justify full
subsidy, esp. given large private returns to HE
DO TOP-UP FEES IMPROVE EFFICIENCY?
- max fee level seems justified given potentially large private returns to HE
- fee variability could mean that costs and benefits for different degree courses,
which vary quite widely, could be more closely aligned  might also allow
some price competition within the university sector, thereby improving efficiency
(but v little variability in practice below fee cap of £3,000)
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EFFICIENCY: RECAP II
Govt aim: wants more people to go to HE, not less
– But won’t the increase in fees effectively improve efficiency by curtailing
excess demand, if university degrees are currently priced below their
optimal level?
Govt aim not as contradictory as it seems:
– New grants and bursaries designed to remove credit constraints for
poorest; in addition poorest see net gain in loan subsidies; also risk is
minimised due to income contingency of loans
In fact, a pure cost benefit analysis would suggest that entry by
poorest should increase
– Note also that overall impact on demand is unclear when (if?) money is
channelled back into improving quality of supply
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‘PROGRESSIVITY’ OF TOP-UP FEES VIS-À-VIS OTHER
ALTERNATIVES?
As we saw, there are other ways apart from fees to boost university
coffers, e.g. tax increases
How does the profile of those who will pay for the additional university
funding compare to other alternatives?
Raising additional funding for universities through deferred fees is
clearly more ‘progressive’ than raising the equivalent funding through
general direct or indirect taxation, since most graduates end up well
into the top half of the income distribution, whilst taxpayers are drawn
from across the income scale
See figure on next page
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PATTERN OF PAYMENTS ACROSS THE INCOME SCALE TO
RAISE £1.2BN FOR UNIVERSITIES (ILLUSTRATIVE ONLY)
Shows an estimate of the proportion of the total income of each decile group
that would be required to raise an additional £1.2 billion from direct taxation,
indirect taxation, and from the GCS
1.00%
0.90%
% Loss in income
0.80%
0.70%
0.60%
0.50%
0.40%
0.30%
0.20%
0.10%
0.00%
1
2
3
4
5
6
7
8
Income Decile
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GCS
Direct taxes
Indirect taxes
9
10
IMPLICATIONS OF HE ACT FOR STUDENTS, BY
PARENTAL INCOME
- Amount of debt students will incur
- Amount of support available through grants and
bursaries
- Will all of this be enough to live on?
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AMOUNT OF DEBT STUDENTS WILL INCUR
(a/s students borrow max amount available to them)
Table 1
3 year course, non-London, non-home
Parental income
Low
Middle
<£17,500 £27,000
Upper
Middle
£37,500
High
>£48,350
Max Fee Loans
9,000
9,000
9,000
9,000
Max Maintenance
Loans
9,290
9,445
12,760
9,665
Total Debt
18,290
19,445
21,760
18,665
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AMOUNT OF SUPPORT AVAILABLE THROUGH GRANTS;
SHORTFALL
Table 1 contd.
Parental income
Low
Middle
<£17,500 £27,000
Upper
Middle
£37,500
High
>£48,350
HE Grants
and Bursaries
9,000
3,445
0
0
NUS Annual
Shortfall
1,620
3,420
3,465
4,520
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Figure 1
Non-London student finances under the HE Act with fees of
£3,000 p.a.
ACTUAL 2006/07 SYSTEM: Non-London Student Finances under the HE Act,
assuming maximum debt
Sources of student funds, £ p.a.
10000
8000
6000
4000
2000
Parental income, £ p.a.
Fee Loan
Maintenance Loan
Bursary
Grant
Shortfall
© Institute for Fiscal Studies, 2007
49
50
0
44
50
0
39
50
0
35
00
0
30
00
0
25
00
0
20
00
0
15
00
0
10
00
0
50
00
0
0
Figure 2
Non-London student finances under the Old System with
upfront fees of £1,200 p.a.
7000
6000
5000
4000
3000
2000
1000
0
0
5000
10000 15000 20000 25000 30000 35000 40000
Fee Exemption
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Maintenance Loan
SHORTFALL
IMPLICATIONS OF HE ACT FOR GRADUATES
• Graduates will start their careers with Governmentbacked debt in the region of £20,000
• These debt levels are around 1.5 times higher than
under the former system for the poorest students, and
around twice as high for the richest students
• Effects of reforms will depend on lifetime labour market
earnings and employment patterns, as debt repayments
are income-contingent and debt write-off clause after 25
years
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IMPLICATIONS FOR GRADUATES CONTD.
So need an estimate of the paths of graduate incomes in order
to assess effects of reforms on graduates
But first, some general observations
1.
All graduates will pay back less than the face value of the loan
(i.e. receive a subsidy), due to 0 real interest rate
2.
Value of the government subsidy to the graduate is decreasing in
graduate lifetime income, because
(1) the subsidy is more valuable the longer it takes to repay the loan,
and low-earning graduates repay more slowly due to incomecontingency
(2) it is low-earning graduates who benefit from the debt write-off
subsidy
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IMPLICATIONS FOR GRADUATES CONTD.
Now, some more specific observations (Dearden et al, 2006)
Based on estimated lifetime income profiles of graduates – full
distributional analysis
1.
Value of the subsidy in the new system is more substantial for females than for
males: amongst lowest earning females, 4/5 of the total value of debt is
subsidised; equivalent figure for males is 2/5
2.
Comparing the old and the new systems
(a)
most grads will be required to make higher total govt debt repayments under
new system, due to higher levels of govt debt upon graduation.
However for the bottom 1/5 of female graduates, the more favourable loan
repayment terms outweigh the increased debt & are likely to make lower
repayments under the new system.
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IMPLICATIONS FOR GRADUATES CONTD.
Comparing the old and the new systems contd.
(b) However, students would need to take out private debt under the old system to be as
well off in university as under the new system.
Taking into a/c the amt of private debt that would have been needed under the former
system, we find that…
– graduates who came from the poorest backgrounds would all pay back less
under the new than under the former system
– for graduates who came from richer backgrounds, it depends on where they end
up in the graduate lifetime earnings distribution
Majority of females pay back more under the former system, the
exception being high earners
Majority of males pay back more under the new system, the exception being
low earners.
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CONCLUSIONS
Under 2003-04 system, average total public and private contribution to
tuition costs of ~£6,000 per year skewed heavily towards the taxpayer,
with ~10% derived from the up-front fee
University coffers need replenishing! Many ways of doing this…
 HE Act 2004 increases private contribution to HE: taking into a/c the
loan subsidy element of the fees, the private contribution will be ~22%
Do top-up fees improve efficiency in HE? There is scope for this but it
really depends on the nature of fees
Do they improve equity? Cannot just consider fees alone: other
significant changes in system of student support put in place at the
same time. Mostly for poorest students
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CONCLUSIONS CONTD.
Top-up fees progressive relative to raising money through direct or
indirect taxation
Implications of 2006-07 system for students: depends on family
background. Upfront support greatest for poorest students, lowest for
richest students
Implications of 2006-07 system for graduates: depends largely on how
they fare out in the labour market. Due to income-contingency and debt
write-off, if they turn out to be low lifetime earners, they will benefit from
substantial subsidy
© Institute for Fiscal Studies, 2007