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Why undergraduate tuition fees are not prices when backed by SLC loans

January 27, 2017

My contribution to Tuesday’s event at Kingston raised an issue to which several audience and panel members returned.

I made the claim that the undergraduate tuition fee is not a price.

What I meant by this is that 90 per cent of eligible students will take out a loan to fully cover tuition fees. The cost of the degree is then determined by the loan repayments made. The government subsidises Student Loans Company loans. This subsidy is largely unpredictable for individuals and can vary wildly – someone who never earns more than the repayment threshold pays nothing and so is fully subsidised; very high earners see no subsidy at all.

Repayments are therefore vague and uncertain, but primarily determined by future income not by graduating debt.

According to neoclassical economics, this means the tuition fee cannot signal as a price should in a perfectly competitive market. The undergraduate course fee cannot give consumers or producers information about relative quality or opportunity.

Only those who go on to be very high earners will see any difference in repayments between a course that charges £7500 per year and one that charges £9 000, or £9 250.   So it does not make sense for universities to diverge from the maximum fee allowable. A potential student would rightly reason that, while they see little to no difference in cost from a higher fee, they will be better off in an institution enjoying more resource per student.  (A postgraduate or international student is in a very different situation – for them, the fee is a price unless they have borrowed on a similar income contingent repayment deal).

As long as there is a subsidy in the loan scheme, the tuition fee cannot be ‘the single best indicator of relative quality’ (as the Browne review put it) and there is no alternative pricing signal.

A neoclassical economics website explains the centrality of the price signal function for markets to co-ordinate activity efficiently:

“[P]rices must reflect costs and benefits. . If people do not take account of substantial costs of their actions, they will act in inappropriate ways. They will either engage in too much of an action (if the ignored effects are costs imposed on third parties) or too little of it (if the ignored effects are benefits enjoyed by third parties).”

The problem in HE is then perceived to be that people are making the wrong choices, because the tuition fee cannot signal the difference between – for the sake of argument – economics and creative arts or economics at different universities. And the costs of a poor decision fall on government / public money (as the backer) when graduates fail to earn enough to repay the equivalent of what was lent to them.

This is a serious problem facing efforts to create a market in English HE. Back in October Theresa May announced an interventionist role for the state where markets are not seen to be working.

That’s why where markets are dysfunctional, we should be prepared to intervene.

Where companies are exploiting the failures of the market in which they operate, where consumer choice is inhibited by deliberately complex pricing structures, we must set the market right.

In undergraduate study there isn’t even a price! So something drastic needs to happen!

If there is no price signal, complex reforms have to be put in place to replicate its function or the market is no more efficient as an allocator of resources than an alternative form of organisation such as central planning. And there would be no point in engaging in extensive reforms to university funding.

The Teaching Excellence Framework is best understood then as an effort to create a proxy signal to indicate quality to potential students and rival institutions through its gold, silver and bronze badges. (In contrast to this consumer intervention, the Research Excellence Framework is a public procurement tendering exercise where future research is funded on the basis of past results).

As a concluding aside, if ‘neoliberalism’ is to be more than a shibbloleth when discussing HE reforms, then its more substantive meanings are to be found by understanding why markets are desired and what impediments there are to their implementation. This then makes the contours of future struggle clear – only by eroding the subsidy in student loans can tuition fees (as they rise and differentiate) become the prices they are so obviously meant to be.

Update

To this I should add the obvious corollary, when people don’t understand how student loans work they are likely to massively inflate the cost and avoid HE as a poor purchase.

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