Does anyone know what England’s higher education system costs?

As arguments for cost sharing in England advance, questions linger over what September changes mean for government-graduate balance

September 19, 2023
Montage of a The Houses of Parliament with Chancellor Jeremy Hunt holding THE budget case and notes and graduation caps floating to illustrate Does anyone know how much England’s HE system costs
Source: Getty images/montage

New students starting at English universities this month might set off on intellectual or career paths, friendships or romantic attachments lasting a lifetime. Also lasting the best part of a lifetime could be their contribution to the funding of the English higher education system, as they get the first instalment of student loans with new, significantly altered terms and conditions.

The important impact for individuals from the changes made by the government for students starting this year – extending the repayment term from 30 to 40 years, lowering the repayment threshold and getting rid of real interest rates – has been widely discussed and widely described as “regressive” in lowering the costs higher-earning graduates would have faced under the old system while raising them for lower-middle and middle earners.

But less widely discussed is how the changes affect who pays what in funding England’s higher education system.

In announcing the changes in February 2022, the Department for Education said they would “lead to significant savings” – for the government.

But the respected Institute for Fiscal Studies (IFS) thinks the changes, because of the way student loan interest rates are now treated in government accounts, actually “increase the total long-run government cost of financing higher education for the 2023 entry cohort from £1.6 billion if the system had remained the same…to £4.1 billion”.

That raises questions. Is the English higher education funding system now so complex that it’s near impossible to understand the fundamentally important issue of the balance between government and graduates in paying for it? What might that mean for the future of a system already viewed by many as unsustainable?

The wider context for this month’s loan changes is that higher education funding in England has largely been funded via student loans since 2012, when public grant funding was slashed and fees were trebled to £9,000.

The reason that move was attractive to the then Conservative-Liberal Democrat coalition government, set on austerity, was because student loan outlay was not included in public sector net borrowing, the government’s chosen measure of the budget deficit. The proportion of loan outlay that the government would never recoup only counted as spending when it was written off 30 years down the line.

This exposed the “fiscal illusions” arising from the accounting rules on student loans, as the UK’s independent fiscal watchdog subsequently put it. Eventually, in 2018, the Office for National Statistics (ONS) announced changes meaning that the government’s estimate of the portion of loans never to be repaid would in future be classed as spending in the year of loan outlay – a change that added £12 billion to the deficit.

Another change made by the ONS was to reduce the interest receivable on student loans that can be treated by the government as income. Only the share of interest the government actually expects to be repaid is now counted.

As in 2012, the accounting rules on student loans seem to be a factor shaping policy: now loan write-offs affect the deficit more immediately, the government is reducing them; now interest rates no longer flatter the figures so much, the government is reducing them.

But despite the accounting rules evolving, judging the effect on public finances from the September changes and what they mean for the balance of funding between government and graduates remains highly complex, as the IFS spotlighted in its analysis.

Kate Ogden, a senior research economist at the IFS, said that because of the benefit for the upper half of earners from the end of real interest rates – a group who “would have paid back a lot of accrued interest” under the old system – “average repayments will likely go down under the new system”.

“If you account for it any sensible way, if government spends the same amount upfront but we expect graduates to repay less, then the cost of the system has gone up for government and down for graduates, on average,” she said.

That the changes, overall, decrease the costs to government on the basis of the ONS’ accounting methodology is “because the amount the government has to write off initially is lower if the interest rate is lower”, said Ms Ogden, “because there will be less unpaid interest they have to write off.”

That spotlights “a weird quirk” in the ONS accounting methodology that “means they [the government] could reduce repayments for everyone, reduce the interest rate and still somehow reduce the initial amount of write-off”, she added.

But to add further complexity, others see the picture differently.

“It certainly seems to me when you look at it from [an individual] basis, rather than from the more complex accounting-type analysis, that the state will contribute less in the long run and the individual will contribute more in the long run,” said consumer affairs expert Martin Lewis, founder of MoneySavingExpert and a presenter on ITV’s Good Morning Britain and This Morning, long an influential voice on student loans.

“So this is a swinging of the pendulum towards the individual.”

Regardless of how the September changes alter the balance, it’s certainly true to say that the coalition’s 2012 changes set a path away from the cost-sharing system introduced by Labour in its system of 2006 – tuition fees of £3,000 alongside publicly funded teaching grants – towards graduates bearing the bulk of the burden.

Changes to student finance increasing costs for graduates have, up to now, had very little impact on the number of students wanting to go to university. But will that continue to be the case?

“Certainly, the initial response, when I explain it, is: ‘University isn’t worth it any more.’ Whenever you mention it on social media, there’s swathes of people saying that,” Mr Lewis said of the September changes.

“That isn’t my belief. But I do believe this change means that those who are going to university simply because they can’t think of anything else to do, or it’s not an active choice, should be looking at the finances.”

That perhaps offers another reason, alongside the political blocks on raising fees from £9,250 and the erosion of funding by high inflation, why it might be prudent for university leaders to advocate more even cost sharing between government and graduates, in the style of Lord Dearing’s 1997 review of university funding, which paved the way to Labour’s 2006 system. Lord Dearing recommended that government, business and graduates should share the costs of higher education – the business element of funding never materialised – reflecting that all those parties benefit from higher education.

Dame Sally Mapstone, the University of St Andrews principal and new Universities UK president, in her speech to the recent UUK conference, called for a “potential rebalancing of who pays for the costs of higher education”, recognising that its benefits were “neither wholly public nor private”.

Sir Chris Husbands, the Sheffield Hallam University vice-chancellor, told Times Higher Education, as he prepares to retire at the end of 2023: “I do think we need to think hard about what the sector looks like over the next 25 years, which probably is a review.”

What the 2012 trebling of fees did was, “crudely speaking”, to “privatise the cost of higher education”, he added.

“If we look across the economy, we’re asking questions about whether water should be in private hands, about our railways, we’re asking about risk sharing,” continued Sir Chris. “It’s silly to say we’re going to take higher education out of that mix. We are going to have to look at cost sharing; we are going to have to look at a range of funding models.”

That argument on cost sharing is echoed by Nick Barr, professor of public economics at the London School of Economics, whose work influenced Labour’s 2006 system.

The IFS analysis of the September changes shows how the new accounting rules on student loans remain “a nonsense in terms of good economics”, Professor Barr said.

His solution on funding would be two-fold: one, “account for student loans in a sensible way…both for good economic governance and to prevent political distortions” such as making loan changes “to flatter public spending figures”; two, “have a transparent cost-sharing arrangement with an explicit tax-financed teaching grant plus student loans, hence a lower, less scary sticker price [in tuition fees] and visible subsidy” from government.

Currently, government subsidy for university teaching, routed via loan write-offs, is perhaps invisible to most graduates, members of the public or even most politicians.

In terms of the right balance of cost sharing between government and graduates, Professor Barr suggested “either side of 50:50 with a margin…determined politically”, adding: “If you get a more visible subsidy, that makes it politically easier to have a reasonable balance and then to maintain that balance, adjusting sensibly in either direction as the economy or events unfold.”

It’s common to hear sector experts such as Professor Barr, or sector bodies like UUK, say that the English funding system is unsustainable. But that argument is echoed by Mr Lewis, perhaps the single most influential figure when it comes to public opinion on student finance.

“We’ve just got a broken system that actually needs quite a fundamental look…The system does not work for many; it’s poorly communicated; it’s fundamentally misunderstood,” he said. “That’s damaging to universities, who bear the brunt of the brand association, because people feel they are paying the university directly…rather than understanding it’s more of a hypothecated form of taxation.

“There are lots of holes in the system, but I don’t know any party that is prepared to tackle it properly,” Mr Lewis added.

In terms of knowing the balance between government and graduate investment, and ensuring that reflects the benefits to society and individuals arising from higher education, this month’s changes seem to head further down one of those holes. And the changes might, perhaps, add to the argument for a review of higher education funding that shines a light on cost sharing.

Loan changes for students starting courses from the 2023 academic year

  • The repayment threshold on these “Plan 5” loans frozen at £25,000 until 2026-27 and will then rise in line with the Retail Price Index (RPI) of inflation (for borrowers who took out the previous Plan 2 loans, the repayment threshold will be £27,295 in 2023-24). 
  • Repayment period after which outstanding loan balances are written off extended from 30 to 40 years.
  • Interest rate on loans will be the rate of RPI inflation (rather than the old system of RPI plus up to 3 per cent).
  • The changes mean that the “highest lifetime earners can expect to repay significantly less than if they had started university in 2022, as a result of the lower interest rate,” the Institute for Fiscal Studies explains. “Low-earning graduates can expect to repay considerably more, as they will repay more each year because of the lower repayment threshold and will make repayments for more years due to the extended loan term.”

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Reader's comments (1)

Another huge fiscal illusion - how much of the average academic's time is spent on productive work (research, teaching), and how much on rather less productive work like admin, grant chasing (whetre there's a 5% success rate), meetings, equal opps monitoring, diversity awareness etc etc. ? And how has this proportion changed over the last 10, 20, years ?