11 November 2021

To stop students being ripped off, it’s time for a radical reform of university funding

By Elizabeth Dunkley

At first glance British universities are a national success story. In under 30 years student numbers have increased fivefold with half of our youngsters now attending university, over a third graduating with a first-class honours. So highly regarded are our universities that international students flock in their hundreds of thousands each year to attend them, paying tens of thousands of pounds for the pleasure. On the surface it seems that British universities have managed something quite incredible: a surge in both size and quality in a way no other publicly funded sector has managed.

However, dig a little deeper and we can see that, when it comes to graduate outcomes, far too many students are being ripped off by a tuition system that encourages poor quality courses. The average student debt in England is £45,000 – the highest in the world. Despite this, our students have some of the lowest literacy and numeracy rates in the developed world and are often woefully underprepared for the world of work.

The Government makes an overall loss on financing the degrees of over half of all graduates. The Institute for Fiscal Studies estimates that approximately 20% of current undergraduates will be poorer as a result of going to university, not least because over a third of graduates are in non-graduate jobs, a rate that has consistently risen since 2001.

These losses are concentrated amongst those studying certain subjects and also differ according to gender. Studying creative arts, for example, has zero impact on earnings for the average female graduate over her lifetime whilst the average male graduate earns on average £94,000 less than they would otherwise. And yet, under the current funding system the subject receives £1.2 billion, the largest subsidy of any subject area. This equates to £37,000 per student, compared with £11,000 for engineers.

The truth is, by any conceivable metric, England has too many universities offering too many courses that are of too little value to their students or to society. At the crux of the issue is the fact that there is a misalignment between risk and reward. When a university fills a place, it receives a tuition fee, regardless of whether the student later repays the loan. This means, as far as the university is concerned, there is only an upside in expansion, so long as the fee covers the cost of provision, while all of the downside risk is borne by the taxpayer.

Universities are also heavily incentivised to provide courses that can be provided as cheaply as possible, in order to maximise numbers, rather than those that offer a long-term return to the student. Of particular note in recent years is the disturbing rise in the number of unconditional offers to those students who are ill-suited to university, and the investment in ostentatious amenities instead of core academic provision.

With all this in mind, a new Centre for Policy Studies report, ‘The Value of University’, proposes a simple but radical change to the way university places are funded. That would be to make the university the lender within the tuition fee system, rather than the Government. At the end of their studies, graduates will repay the universities, making the universities responsible for any shortfall from defaults rather than the taxpayer. This reversal in risk would ensure that universities focus on providing good value for money for students, and courses in subjects such as science, technology, engineering and mathematics, where we badly need more graduates.

Becoming responsible for their own loan portfolios would encourage universities to innovate in the type of courses they provide. Replacing some degrees with shorter or online-only courses, which would be cheaper, could become very attractive to both university and student.

Most importantly, it will be a system built around quality rather than quantity. Over time these changes will lead to improvements in outcomes for students whilst limiting courses that offer the worst outcomes and push the system towards becoming self-financing.

These moves could save the Treasury as much as £7 billion per year which can be funnelled into funding for research and development as well as technical education, to provide school-leavers with a worthwhile alternative to university that will earn them more in the long term as well as helping to plug the £63 billion digital skills gap.

These proposals will incentivise universities to do the best for their students, rather than for themselves. Perhaps, more importantly, they would ensure that more students take up courses that they and the country need so that both would be better off in the future.

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Elizabeth Dunkley is a researcher at the Centre for Policy Studies.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.