Hepi predicts fee cap rise but no boost in subsidy

The Government may top slice universities' income from student tuition fees or force students to pay more of their tuition costs upfront, if it raises the current £3,300 fee cap.

These are among the scenarios outlined in a report published this week by the Higher Education Policy Institute, Funding Higher Fees. It warns that in the likely event that the Government opts to increase the £3,300 cap, it is not likely to be willing to commit further public funds to subsidise the funding system.

The Government currently spends about £1.4 billion a year providing subsidised loans to students to cover the upfront costs of tuition fees and up to £6,500 of living costs. The loans are repayable only when a graduate is earning a minimum of £15,000 a year, and interest on repayments is paid only at the rate of inflation.

"The current system, while highly progressive, is very expensive. Nobody should assume that if the Government raises the fee cap it will also raise its subsidy. But if the taxpayer isn't going to pay, somebody else will have to," said Bahram Bekhradnia, the director of Hepi.

He added: "There are no pain-free options."

The Hepi report pre-empts the Government's own review of the tuition fee system that will take place in 2009. It predicts that a limit on the maximum fee that universities charge will stay, because allowing institutions to charge unlimited fees would "run counter to the direction taken by governments in almost every other country with tuition fees".

In the US, where there is an unregulated tuition fees market, costs have spiralled, the report says.

Hepi expects the sector to argue for an increase in the maximum tuition fee they are allowed to charge, rather than for raising fees.

Chris Higgins, vice-chancellor of Durham University, said: "The fee cap would have to be lifted to more than £5,000 to ensure a competitive differential between universities."

The report discusses four potential fees regimes (see box), all of which assume that the Government will not increase its current public spend on the system, based on two hypothetical future fee caps of £5,000 a year and £7,000 a year.

Under the current system if the fee cap were raised to £5,000, the total cost to the Government of providing loans would rise by around £200 million per year, while a £7,000 cap would cost an extra £320 million, Hepi estimates.

One option the report discusses would see students continuing to receive fully subsidised loans to cover the higher costs of fees. A portion of the additional fee income would be repaid by universities to the Government, to offset the public costs of a bigger loan programme.

But a downturn in the graduate labour market could lead to the amount passed back being insufficient to offset additional taxpayer costs, Hepi warns.

Mr Bekhradnia said: "This option is not at all popular with universities."

Under the second option the Government could choose not to provide loans for fees above the current £3,300 maximum, leaving students to finance any additional fees themselves. "This would represent a major break with the principles of the 2006 reforms, which established that no student would have to rely on his or her family for any part of the cost of tuition," the report says.

Fee waivers could be applied to disadvantaged students to ensure that these were not deterred. But waivers could "eat significantly" into universities' income from fees, Hepi warns. Institutions with fewer students from poor backgrounds would therefore gain more benefit from the same level of fee.

A third option would see student loans offered at interest rates higher than those currently charged.

Offering a loan charged at a "small real-terms rate of interest" to cover the entire tuition fee is an efficient way of maintaining public expenditure at its current levels, Hepi concludes. But it acknowledges that this approach "might well encounter some resistance from students".

If the fee cap were raised to £5,000, the loan interest rate would have to rise by 0.3 per cent to maintain costs at current levels, Hepi estimates. With a cap of £7,000, an interest rate rise of 0.5 per cent would be required to offset the rise in costs.

This approach would result in increased costs for all students, including those opting for cheaper courses, in order to pay for those on courses with the highest fees.

"Assuming the take-up rate remained the same, each above-inflation rise in the total fee charged across the sector would reduce the subsidy and increase standard interest rates for all students," the report says. The sector might therefore need to offer more bursaries to students from lower-income families, regardless of the fee paid, Hepi suggests.

The final option discussed is for unsubsidised "top-up loans", under which fully subsidised loans would cover fees up to £3,300 while unsubsidised loans at normal interest rates covered any additional fee.

Graduates on the courses with the highest fees would therefore face the highest debts. The report notes that this is a complex option and could result in students who do not need maintenance loans taking them out in preference to top-up loans to cover additional fee costs.

Anna Fazackerley, director of the education think-tank Agora, said: "After the bloody battle over top-up fees in Parliament, people often assume that the biggest political problem with raising the fees cap is getting it past angry middle-class parents who have got used to cheap higher education and angrier backbench MPs looking for something to clobber the Government with.

"But the reality is that the biggest stumbling block will be selling the short-term hit of a fees hike to the Treasury."

Nick Barr, professor of public economics at the London School of Economics, said: "The one to choose is whichever offers the best chance of evolving over time into a system in which the default interest rate on all loans is the Government's cost of borrowing, with targeted interest subsidies where they serve a useful social policy purpose."

Wes Streeting, National Union of Students vice-president (education), said: "This is a useful but limited report. It is encouraging that the authors have cast doubt on the viability and fairness of big fee increases and an unregulated market, but the focus of the study is far too narrow.

"The NUS wants to see a far more open review that goes beyond the simple question of what level the fee cap should be set at. This must allow for changes to the whole funding system, while also tackling variability in fees and the emerging market in bursaries, both of which are damaging to students and to higher education."

Diana Warwick, chief executive of Universities UK, said: "Variable fees impact on a broad range of students, not just full-time undergraduates in England. UUK has already recommended that the 2009 review should consider the impact of variable fees on part-time students. We also need to consider the impact of English fee policies on Wales, Scotland and Northern Ireland."

melanie.newman@tsleducation.com

The potential fee scenarios

OPTION A

Fully subsidised student loans, with a portion of universities' additional fee income used to offset the public costs of a bigger loan programme.

Universities would pass a share of their additional fee income back to the Government or the Government would reduce grants from the Higher Education Funding Council for England.

The amount passed back or deducted would be based on the average fee charged for the institution as a whole.

DISADVANTAGES

• Increases volume of subsidised lending;
• Imposes additional costs on universities;
• The amount repaid may be too low to offset additional taxpayer costs, as a result of a downturn in the graduate labour market;
• If the amount repaid exceeds that required to offset additional taxpayer costs, there would be resistance from institutions;
• If an institution's Hefce grant is much lower than its fee income, it could fall foul of the Charities Act, which requires universities to show that they operate for the public benefit.

ADVANTAGES

• Students would benefit from a fully subsidised loan with no real-terms interest;
• Graduates with larger debts would receive greater public subsidy - attractive from a widening participation point of view.

OPTION B

Subsidised loans cover fees of up to £3,300, plus an unsubsidised "top-up" loan to cover costs above this amount.

Graduates of courses that charge the highest fees would face larger loan debts and additional interest payments.

Top-up loan interest rate would take into account government costs of borrowing and additional costs of students taking longer to repay subsidised loans.

ADVANTAGES

• Weaker incentives for the Treasury to ration loans compared with Option A.

DISADVANTAGES

• Complex, with students having to repay two loans that incur different rates of interest;
• Risk that students not in need of maintenance support may use maintenance loans to cover additional fee costs;
• Students from lower-income families are more likely to have to rely on the loan to meet higher fee costs.

OPTION C

Partially subsidised loan (ie, small real-terms interest rate) for all fees including maintenance, whatever the level of fee.

ADVANTAGES

• As with Option B, there is a weaker incentive for the Treasury to ration loans compared with option A;
• Simple - one loan at the same rate of interest would cover the whole of the total costs of the tuition fee and the maintenance fee;
• No advantage to paying fees through maintenance loans;
• All students pay the same interest rate, whichever course they are taking;
• Flexible - relatively easy to reduce subsidy by raising interest rates.

DISADVANTAGES

• Resistance from students, because it would result in increased costs for all students.

OPTION D

Subsidised loans would cover fees of up to £3,300 - there would be no government loan beyond this amount.

Students would only be able to defer payment of any fees above £3,300 using commercial loans, otherwise they would have to make an upfront payment.

Universities would offer fee waivers to students from low and middle- income households.

ADVANTAGES

• Additional parental contributions and bursaries/fee waivers may be seen as more politically feasible than increases in student borrowing;
• It would not entail changes to current borrowing arrangements.

DISADVANTAGES

• Fee waivers would significantly reduce institutions' income from fees for universities with large numbers of students from deprived backgrounds;
• Universities with fewer such students would therefore benefit more from a rise in the fee cap.