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Why HE sucks in 2015 …

July 4, 2014

The following is based on my contribution to last weekend’s conference at Liverpool Hope, ‘After the Coalition’ conference. (For non-UK readers, there is a general election in 2015).


After 2015, English Higher Education policy will be circumscribed increasingly by student loans.

Annual loan outlay is anticipated to rise from the current figure of £10billion per year to over £15bn.

Annual loan repayments have yet to reach £1.5bn. Until annual repayments match annual outlay, the government will have to borrow to support the financing scheme.

The 2010 Comprehensive Spending Review protected, and even increased in some cases, university income in nominal terms over the course of this parliament. Under ‘austerity’ conditions, this was achieved by displacing cuts onto the increased future contributions  of graduates. These augmented repayments are looking less likely to materialise: the estimated loss on loans has now risen from 30% (November 2010) to 32% (Summer 2011) to 35% (December 2013) to 45% (March 2014).

For each pound loaned, the government now only expects to receive the equivalent of 55p back in net present value terms. Each penny being the overall equivalent of £100m+ on annual outlay over £10billion.

The Treasury currently allows BIS to budget for a 36% loss and so we are looking at a budget ‘over-run’ of roughly £1billion per year. Changes to the accounting conventions for student loans were introduced in April: this is a significant move which protects the other planned spending within the department but will only work if the current difficulties around loans prove to be relatively short-lived.

There is uncertainty now as to whether the graduate labour market has experienced a cyclical downturn or if we are facing fundamental changes. Fewer than 60% of graduates with outstanding ICR loan balances made any repayments at all in 2013/14: the repayment threshold on those loans was only just above £16000. There is now a general lack of confidence in the generic value of a degree. The most recent IFS report suggests that there may have been a dilution of graduate quality:

… lack of growth in average earnings might be due to changes in the composition of graduates: as more individuals obtain degrees, the average quality of degrees may have declined.

We should therefore anticipate a freezing of the loan repayment threshold at £21000 in 2017. Although the threshold was supposed to increase annually in line with average earnings, there have been clear indications that those currently in power favour this as one response to lower than anticipated repayments. But this will not be sufficient.

The next spending review will extend to 2020 and public spending will still be tight given the fiscal commitments of the major political parties.

There are no further accounting tricks to be done with student loans. The anticipated £10-12bn revenues from a sale of ‘pre-2012’ loans to the private sector will have to be revised down, if a sale is still possible. BIS applied to the Treasury in February for a ‘supplementary reserve claim’ of £5.5billion to cover the write-down in value of existing loans – also now estimated to generate much lower repayments. Outstanding loans balances now total a nominal £54billion, but the ‘fair value’ may only be booked at £30-35bn when the 2013/14 BIS accounts are published later this month. New long-term modelling now has ‘peak’ aggregated graduate debt hitting £330billion in the 2040s.

What then of the planned uncapping of undergraduate recruitment?

If it proceeds as ‘planned’, then we should expect loan outlay to be controlled through the introduction of a ‘minimum UCAS tariff’: only those who achieve minimum grades will be able to borrow money towards their fees and maintenance. Who can benefit from HE will be determined centrally; the government’s role as investor and lender will involve determining who is creditworthy. It should be noted that the tariff would determine a pool of funded students setting up a zero sum game for recruitment.

On the other hand, we should expect the maximum tuition fee to be frozen. Universities blew a lot of goodwill by setting headline fees at £9000, especially with the government, when the cost-base for classroom subjects is thought to be much lower.

Elite institutions will lobby for high-cost subjects – science, technology, engineering & medicine in this case –  to benefit from a different level of maximum fee. They will argue that their graduate are ‘good for’ higher levels of borrowing and emphasise that the 45% loss on loans is a mean which hides wide distributions.

In the longer run, measures of repayment by course and institution may also be used to assess whether public funding should be offered, as will drop-out rates, though the threat of any sanction will be stronger than the execution. This leads to the assessing the creditworthiness of institutions as well as individuals. In the first instance however, the data only needs to be good enough to justify two tiers of maximum fee (or three if you count the £6000 tuition fee loan cap at private institutions).

What I am suggesting is that with a certain level of policy continuity, we will see the dissolution of the unitary funding settlement in place since 1993: that institutions receive the same ‘unit of resource’ for each student studying the same subject. This will have profound consequences for equity within the system, if that term would even still be appropriate.

That said, were Labour to form the next government then its 2011 pledge to lower the maximum tuition fee to £6000 will now be more feasible: the government margin on what is borrowed over £6000 per year fees is now almost all loss! There is as yet no indication as to what mechanism would recompense university income for the lower fees, but we shouldn’t assume direct public funding would go through Hefce as opposed to, say, regional pots associated with Local Enterprise Partnerships. This will present a challenge to the overblown conceptions of ‘institutional autonomy’ trumpeted by vice-chancellors.

Again, the more prestigious institutions will demand different treatment and lobby for forms of independence, while maintaining access to student loans and research grants, pointing once more to the end of what was introduced in 1993.

So in sum I am predicting further change and possibly more disruption – especially to the business and financial plans of universities. As I have argued previously, the governance of our universities is inadequate for current conditions let alone what I have outlined above. Expect paroxyms as fundamentally weak, untested managements struggle.  That makes current initiatives to ‘democratise’ the university more urgent.

My hope though is that 2015 sees the end of the view that universities are ‘firms that specialise in the production of training’ (Becker) which are funded by governments or government-backed loans because of future monetary returns on investment. I would prefer to see funding arrangements adjusted to encourage part-time and lifelong study (an end to ELQ, please). We should be encouraging universities to be civic, democratic and participatory bodies that play a vibrant part in their locales.

  1. dkernohan permalink

    Nicely done.

  2. Spot on.

    For some reason, I have the figure topping out at £1 trillion. I think I’ve misremembered.

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