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Increased Uncertainty

Increasing the cap on tuition fees has raised more money for universities, but the cost to the government of doing so is hugely uncertain, new research finds.

The impact of the government’s 2012 reforms to higher education funding in England on the public finances has primarily been an increase in uncertainty, according to new research. At present, it looks like the reforms will do little to reduce taxpayer contributions to higher education, but whether and how much public money may be saved will not be known for decades to come, the analysis suggests.

The reforms introduced in 2012 scrapped teaching grants for all but the most expensive subjects and instead enabled universities to charge higher tuition fees. Because students can borrow money from the government to cover their tuition and maintenance costs – and only have to repay these loans once their income is above £21,000 per year – the amount that will be repaid, and hence the overall cost of higher education, depends on how much graduates earn over the next 30 years, which the government can only estimate. The reforms have thus replaced the certain costs of providing teaching grants with the highly uncertain costs of issuing larger student loans, the analysis shows.

These findings are detailed in a new research report, ‘Estimating the Public Cost of Student Loans,’ conducted by the Institute for Fiscal Studies, an independent research organisation that specialises in UK taxation and public policy issues. The authors are Claire Crawford, assistant professor in the Department of Economics at the University of Warwick and IFS research fellow; Rowena Crawford, an IFS senior research economist; and Wenchao Jin, an IFS research economist.

Increasing the cap on tuition fees has raised more money for universities by increasing contributions from students...

The analysis seeks to provide an independent estimate of the public finance implications of the provision of undergraduate student loans. ‘Without such knowledge, it is not clear how the government can make informed decisions on policy reforms,’ the report notes.

Summarising the potential policy implications of the report’s findings, Claire Crawford said ‘The fact that the government subsidises the provision of student loans means that any policy change which increases the value of loans issued will also increase the public cost of higher education. This means, for example, that sending more students to university or raising fees would both cost the government money. In fact, we estimate that an increase in fees of just £500 per year would mean that the total taxpayer contribution to higher education would be the same under the new system as under the old one.

But of course universities are now getting more money to cover the costs of teaching undergraduates than they were before: we estimate that income from teaching grants and tuition fees has increased by over 25% on average. The reforms have therefore secured an increase in resources for universities by increasing the contributions made by those who have been to university rather than from taxpayers more generally. Whether you think these reforms are an improvement on the previous system thus depends on how you weight these different priorities.

...but the public cost of the new higher education finance system is now much more uncertain

One of the key points made by the report is that estimates of the public cost of higher education depend on many factors that are themselves highly uncertain - including graduates’ incomes and loan repayment rates - over many decades into the future. Using forecasts for graduate earnings produced by the Office for Budget Responsibility (OBR) in December 2013, the researchers estimate that the 2012 reforms look like they will do little to reduce the total taxpayer contribution per student compared to the previous system – but whether and how much money may be saved will not be known for decades to come. Indeed, had earnings been at the more optimistic level expected by the OBR in March 2012, the reforms would look to have saved the government substantially more money than they do now. This emphasises the highly uncertain nature of such estimates.

The research focuses on a particular cohort: young, English, full-time undergraduate students who started university in 2012, the first year of the new higher education finance regime. Among the key findings:

  • The authors’ baseline estimates suggest that for each £1 of loans issued, the cost to the government will be around 43p. (This figure expressed in percentage terms is sometimes referred to as the Resource Accounting and Budgeting [RAB] charge, a term used to identify the government subsidy inherent in the student loan system.)
  • The average amount lent to each student is estimated to be just over £40,000, meaning that the average loan subsidy amounts to just over £17,000 per student in today’s money.
  • Around 60% of this subsidy arises because some loans will never be repaid in full, while around 40% arises because loans are, on average, offered at interest rates below the government’s long-run cost of borrowing; in other words, from the fact that it costs the government to borrow the money to lend to students.
  • Adding in other sources of government spending on undergraduates over the duration of their course (such as teaching grants to universities and maintenance grants to students) increases the total taxpayer contribution per student to just over £24,500 in today’s money. At around £7,600 per year of study, this is slightly more than the average £6,000 that the government spent per secondary school pupil in 2012–13.
  • This estimated total taxpayer contribution is only 5% (around £1,250 per student in 2014 prices) less than under the previous system. However, universities are now receiving around 25% more funding per student for teaching from the combination of tuition fees and teaching grants than they did before.

These estimates are extremely sensitive to assumptions about what happens to graduates’ earnings over the next 30 years, however. For example:

  • The baseline estimates assume that earnings grow in line with OBR forecasts from December 2013. If, instead, earnings were to follow the more optimistic path forecast by the OBR in March 2012, the estimated average long-run cost to the government would fall to 34p per £1 issued, rather than 43p.
  • Using the more optimistic March 2012 earnings forecasts, the authors estimate that the total taxpayer contribution would be 15% (around £3,700 per student in 2014 prices) lower under the new funding regime than under the system that was in place up to 2011–12 (compared with 5% using the more pessimistic earnings growth forecasts from December 2013). What happens to graduate earnings over the next 30 years, therefore, matters hugely for whether, and how much, the new system saves the government money.

Increases in fee levels or student numbers would both increase the estimates of the long-run public cost of issuing student loans. For example:

  • Assuming students borrow more from the government in order to cover any increase in fees, the authors estimate that a rise in fees of just £500 could raise the taxpayer contribution under the new system to the same as under the old one.
  • In the 2013 Autumn Statement, the government announced that it would lift the cap on student numbers and estimated that this would mean an extra 60,000 students going to university each year. Assuming that these extra students go on to have earnings in the bottom half of the graduate lifetime earnings distribution, issuing student loans to these students over the duration of their courses would cost the government an additional £1.7 billion.

If the government wanted to reduce the loan subsidy under the current system, it could increase the repayment rate, reduce the repayment threshold or extend the repayment period. Each of these would tend to increase the repayments made by middle-earning graduates. Alternatively, the government could choose to raise the interest rate charged, which would only affect high-earning graduates.

The report was funded by the higher education advocacy organisation, Universities UK. Additional support was provided by the Nuffield Foundation, which aims to improve social well-being by funding related research; and the Centre for the Microeconomic Analysis of Public Policy at IFS, which aims to carry out cutting-edge empirical analysis of major public policy issues. The Centre is funded by the Economic and Social Research Council.

The full report is available through IFS.

Claire Crawford and Wenchao Jin also recently published a tandem report analysing the full implications for graduates of the new student loan system that accompanied the higher tuition fees. The report, ‘Payback Time? Student Debt and Loan Repayments: What Will the 2012 Reforms Mean for Graduates? ’, shows that most graduates will still be paying off student loans into their 50s, and nearly three-quarters of graduates will fail to clear their student loans before they are written off after 30 years. The research was funded by The Sutton Trust, a foundation dedicated to improving social mobility through education, and was undertaken through IFS. The full report is also available through IFS.

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