Funding for students hoping to attend university is likely to undergo a radical overhaul in the near future.  The recently published Browne report makes a number of controversial recommendations aimed at making the costs of studying at university manageable for the Government and fair for the students.

A brief history of university funding

Historically, a university education was the sole preserve of the wealthy.  After the second world war, the government started to offer financial help to allow young people from poorer backgrounds to enjoy the benefits of studying for a degree.  The Education Act of 1962 impelled local authorities to provide a National Mandatory Award for students accepted to read for a degree.  This award paid the students’ tuition fees as well as providing a maintenance grant to cover the cost of living away from home.

However, the student population started to increase as new universities opened and more and more people sought the benefits of this free education.  By the end of the 1980s the student population topped 2 000 000; representing a third of all school leavers.  Sums paid to universities began to be linked to their performance, but the total bill footed by the taxpayer became increasingly onerous.

The Student Loans Company

The Student Loans Company was set up in 1990 to provide affordable loans to university students with the aim of providing a means for students to take responsibility for some of their living costs.  These initial student loans charged interest mirroring the retail price index, a measure of inflation.  Repayment of the loans was on a mortgage style basis, with monthly payments being taken from the student over a period of five years (seven for longer degrees) once the student’s income was above the threshold for repayment.

The introduction of tuition fees

In July 1997 the National Committee of Inquiry into Higher Education published a report advising that students should begin to contribute towards the cost of their tuition fees.  The report suggested that a graduate tax should be applied in order to help fund the spiraling cost of university education.  However, the government decided instead to introduce tuition fees of £1000 per year, to be funded through the existing student loans structure. The maintenance grant was finally abolished in 1999, with the poorest students being given access to a larger loan to cover their living costs.

These larger student loans could no longer be reasonably repaid using the original system, as the monthly payments would be far too high for many graduates to afford.  Instead, a new repayment system was introduced, known as Income Contingent Repayment (ICR).  Under this system, repayments are collected from students directly from their employer, like PAYE tax.  The payments correspond to 9% of all income earned over £15 000 per annum.  The payments continue until the loan is recovered, but the debt is written off after 25 years of payment, or when the student reaches the age of 65.

The latest change to university funding was the introduction of variable tuition fees (so-called top up fees) in 2006.  This change allowed universities to charge students up to £3000 per year in tuition fees.  In practice, almost all courses charged the full allowance.  Tuition fees were capped at this level (now £3029 due to inflation) to ensure the burden of the student loan did not become too great.

The new proposals in the Browne report

The main proposal of the Browne report is that the cap on tuition fees should be removed.  In theory, universities would be able to charge as much as they wished, but if they chose to charge above £6000 they would need to contribute some of the extra to the government.

The report also recommends some changes to the student loan repayment mechanism to make the inevitably much larger student loans more affordable to graduates.  It proposes that the income threshold for beginning to repay the loans should be raised to £21 000 per annum, and that repayments should represent 9% of any income above this value.  If any debt remained after 30 years the loan would be written off.

The Browne report estimates that 20% of graduates would not repay any of the money they borrowed, and only the highest earning 40% of graduates would repay the loan in full.  For the remainder of graduates, the repayments would basically constitute an extra 9% of income tax on any income above the £21 000 threshold.

Costs and benefits of a university education

The likely effect of these changes will be to increase competition between universities, who will now need to clearly demonstrate to potential students that they offer value for money.  Students are more likely to choose their courses more carefully based on the perceived quality of teaching, the value of the resulting qualification to employers, and graduate employment prospects of the degree.

For students, the likely changes represent another increase in the cost of the degree, with new students now likely to incur so much debt that many will spend their entire working life repaying their student loan.  There will effectively be a “graduate tax” of an extra 9% on all income earned over £21 000, so graduates will be paying 60% “tax” in the higher band, once loan repayments and National Insurance are taken into account.

If implemented, these changes will effectively mark the end of a subsidised university education, with the majority of students taking on the cost of their degrees themselves.  However, the report does recommend an affordable mechanism for collecting payments, and the skills and knowledge obtained whilst studying for a good quality degree can be of immense value to an individual.  Graduates can still expect to earn on average almost £150 000 more over their lifetime than non-graduates, so a university education remains a good lifetime investment.

Sources

Lord Browne “Securing a Sustainable Future for Higher Education” (2010)

Department for Employment and Learning “Graduate Earnings: An Econometric Analysis of Returns, Inequality and Deprivation Across the UK” (2008)

D Gillard “Education in England: A Brief History” (2007)

Education Act 1962

HM Revenue and Customs

Student Loans Company