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The cost of abolishing tuition fees

May 12, 2017

Labour will enter the general election committed to abolishing tuition fees for undergraduate study (for English-domiciled and EU students studying in England).

London Economics and the Institute for Fiscal Studies have provided independent costings for the policy. Both take different approaches and have different modelling parameters.

London Economics have modelled the long-run economic cost of the change to be an additional £7.5billion per cohort of students (including FT and PT).   IFS reach an the same long-run cost figure per cohort but excluding part-time students (see Note 2 of their Observation). Additionally, IFS have outlined a £12bn increase to the deficit and show the graduate contribution (repayments in real terms) reducing to an average of £17,300 (or £13,500 when some maintenance grants are reintroduced).

These models are both extremely useful for considering the policy implications of Labour’s proposal. I would like to suggest a different tack by looking at current loan outlays and fee receipts.

The Student Loan Company issued tuition fee loans to 93% of eligible English-domiclied students in 2015/16. It made such loans to 964 000 individuals and these amounted to £7.685bn. Of the last, c. £340m was loaned to English-domiciled students going to study in the Rest of the UK. Another £345m went to EU students at English HEIs. The average tuition fee loan granted to a full-time student at an English HEI was £8,020 (for the year).

Provisional figures for 2016/17 – released in November – show an initial tuition fee outlay of £8.65bn for full-time undergraduates.  This may well reduce as the figures do not include any tuition fee waivers that an HEI may be applying nor do they reflect withdrawals in-year prior to term 3 (which would see payments reduce). At this stage, the average tuition fee loan made to an English-domiciled student was £8,440.

If we cross-reference this SLC data with undergraduate fee income received by institutions we see similar figures. The HESA statistical return for 2015-16 showed that English HEIs received £7.9bn in undergraduate tuition fee income. Hefce’s last financial health report showed aggregate institutional projections for this same fee income (in red below).

New Picture

These sources of information would seem to give us an estimated tuition fee outlay for 2016/17 in the region of £8.5bn for FT undergraduate. Note that the HEFCE fee income data includes those students who pay their fees upfront without SLC loans (but excludes sums laid out for those English students who study in Wales, N Ireland and Scotland).

In contrast, IFS and London Economics reach their full-time cohort figures as follows (based on correspondence and conversations with the authors of both reports).

IFS: 365 700 students take out £29,600 in tuition fee loans (average course length of 3.25 years) => £10.8bn or £11bn.

London Economics: 388 855 students take out £8,781 in fee loans per year (average course length and some non-continuation equating to 3.13 course years) => £10.686bn.

I suggest that the cash cost of Labour’s policy might be significantly lower than the IFS and LE models suggest and that if Labour commits to pound for pound matching of institutional teaching grant with fee income, an overall cash envelope is likely to be based on historic income and outlay data. And, to underscore the basic fiscal point: institutional teaching grant counts as current expenditure and therefore affects the deficit and Labour’s own fiscal rule dealing with the current balance. (Student loan outlay does not score against expenditure but does contibute towards public debt thought the public sector net cash requirement).

One final point, the IFS note includes a distributional analysis – which graduates benefit most from tuition-fee free policy.  This is what will underlie criticisms of Labour’s proposal as ‘regressive’ or providing a subsidy to the future middle classes.

ifs distribution

That’s by no means the final word on the policy but it’s important to understand the main objection. In the next week or so, I hope to type up my recent paper on polytechnics which outlines what changes I would want from universities in return for the restoration of significant teaching grant – part-time, lifelong is the key (rather than the boarding school model of 3 years away from home at 18).

  1. Gary permalink

    If Labour’s policy was stand alone the beneficiaries would be future middle class. However, it should be coupled with the increased income tax that was also announced, so the impact on the future middle class would be the same, just in tax rather than debt. So the choice is between whether you want graduates to pay in future tax or in future debt repayment, both of which would be taken from their pay packet. Politically and in marketing, there’s a big difference, but in reality it’s six of one, half a dozen of the other?

    • The IFS will probably publish an analysis of this kind on Tuesday when they review all the manifestos. I can’t see it being as neat as you suggest – the middle class beneficiaries of abolishing tuition fees are larger than the group who would consistently earn over the new tax bands. So on the IFS chart above it’s roughly the top two graduate deciles that might get caught by the new taxes, but deciles 4 to 8 would see lower repayments and no additional taxes. Plus, an extra 5p on each £ earned over £80 000pa (40% against 45% inc tax) is being offset against 9p over £21 000 (for several years).
      I don’t think it’s likely to all even out. But that’s only a rough set of thoughts.

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