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Higher Education Commission presents six options for future of HE funding

A new Higher Education Commission report that is highly critical of present government policy on higher education funding has presented six options for the future development of the system.

The report, which follows a ninth month inquiry into the sustainability of HE funding in England, says the present system is "worst of both worlds", with neither the Government nor students benefitting from recent reforms.

It report warns that while students are now paying more, the Government is still writing off high-levels of debt - meaning "everybody feels like they are getting a bad deal". The current funding system is not financially sustainable, and it is unclear how higher education will be safeguarded in the future, it adds.

The report analyses the contributions made by each stakeholder at present, and presents six options for improving higher education funding in the future:


Option 1: Maintaining the status quo

Potentially the most attractive option for the Government would be to maintain the status quo.

This means undergraduate degrees would continue to be funded by the servicing of graduate debt, and the system would retain the problems it currently faces.


A benefit of keeping the status quo is that the sector would maintain stability. This is particularly important as universities have already spent a great deal of time and resources adapting to the new system. Any further changes would mean more upheaval.

In addition, small changes could be carefully targeted to avoid large, unforeseen consequences across the sector.


But making small tweaks to the system – such as increasing the interest rate on student loans to increase revenue for the Government, or indexing student fees with inflation to help universities – tend to increase the burden on students.

The commission says tweaking the system would simply continue the policy along the wrong path in the eyes of many in the sector.


Option 2: Graduate tax

Under a graduate tax system, tuition fees would be abolished and the HEFCE teaching grant would be increased to £7.34 billion a year. The Government would need to borrow £4.1 billion to fund this.

Abolishing tuition fees would reduce the student loan subsidy and save the Exchequer £3.16 billion for each cohort of students.

Under a model developed by analysts London Economics, graduates earning from £25,000 to £42,000 would pay 2.75 per cent of their earnings in graduate tax, while those earning above £42,000 would pay 3.50 per cent of earnings in tax.


A benefit of this is that it is thought to be the most progressive funding regime - meaning lower earning graduates are not paying proportionally more than their higher earning peers.

In addition, upfront costs for higher education would be kept down, as there would be no upfront tuition fees to pay.


A disadvantage is that the Government would need to pout a large amount of money into universities during the transition. In addition, the taxes would be paid to the Exchequer but might then be diverted to other government priorities, leaving universities underfunded.

There are also problems associated with chasing down payments from those who move overseas after graduation.


Option 3: Lowering fees, increasing Government grant

In a model developed by London Economics and Million+, fees could be reduced to £6,000 a year while the Government would have to pay an extra £1.72 billion.

Lowering fees and increasing the HEFCE grant would mean that students would graduate with less debt.


A greater percentage of students would pay off their loans entirely, meaning less debt would have to be written off by the Government.

Increasing the HEFCE grant would mean the UK's public contribution to higher education would rise in a transparent way, meaning the country would rise in rankings such as the OECD's "Education at a Glance" reports.


Universities prefer to receive funding from students in the form of fees rather than Government grants, as they believe it is more reliable and gives them more control and autonomy.

In addition, higher earning graduates would have less debt to pay while lower earning graduates would repay a greater proportion of what they borrow.


Option 4: Lifting the fee cap

Lifting the fee cap would mean universities would be able to increase their fees to cover their teaching costs in full, or to the level that students would be prepared to pay given employment outcomes.


This means universities would be able to recruit more staff and increase support for research, allowing them to better compete on a global scale.


Lifting the fee cap would increase student debt further and increase the amount of government funding needed to subsidise loans.

Modelling by the Institute of Fiscal Studies shows that lifting the tuition fee cap would mean the Government would end up writing off more debt than it recovers.


Option 5: Hybrid system

A hybrid system would combine a number of models. Students would be entitled to undergraduate tuition fee loans of £6,000 per year, while all citizens would have a lifelong learning pot of £15,000 which could be used for a higher qualification at any point over the course of a person's life.

Universities could charge tuition fees over £6,000, but for each £1,000 charged above this soft cap, they would be required to pay back to the Government a proportion of the sector-wide student loan subsidy.


This would benefit students, as universities would be incentivised to keep their prices low.


High-charging universities would have less chance of recruiting top students who would stay on to postgraduate level, as these student would already need to dip in to their “lifelong” pot to pay for their undergraduate course.

A problem with the system is that it could be overly-complex. Students would have to be very savvy with their funding pot in this system. In addition, institutions with strong reputations could strengthen their position by increasing fees to the maximum.


Option 6: Differential fees

Differential fees would allow universities to charge rates that better reflect the costs of teaching.

The subjects in the lowest HEFCE band - which receive no support from the government - could have a fee cap of £7,000, while this could increase by £1,000 for each band to £10,000 for subjects which cost the most to deliver.


This would create a more transparent system, and students with higher employment prospects would be charged more, yet would be more likely to pay off their loans.


The proposal would mean the Government would have a large amount of control on what universities may charge, reducing autonomy for universities.

In addition, students tend to dislike differential fees, as it looks as if the cost of a course is related to its quality.


HEi-know gives you the full picture: HEi-know Briefing Report 214