By: Shimeon Lee, researcher
As students head off to university this September, they are entering a higher education system that has changed considerably in the last year. Due to the tightening of immigration rules by the previous government, the market for international students has shrunk, and thus, so have university revenues. As universities plead poverty, it is time to reevaluate how taxpayers fund these institutions.
Universities earn considerably more from teaching international students compared to UK citizens, accounting for up to a fifth of universities’ income. This has led to what a Lords committee called an “unhealthy dependency”. One of the reasons for this is that, unlike home students, overseas fees are not capped. This allows universities to charge a price that actually reflects the cost of delivering degrees, including the cost of subsidising home students. For example, international students studying a PPE (Philosophy, Politics and Economics) degree at Oxford will pay £41,130 a year. In contrast, home students will pay only £9,250 - the maximum universities have been allowed to charge since 2017.
Due to recent high inflation rates, universities actually make a loss when teaching domestic students, a situation exacerbated by the fall in overseas fee revenues. Universities claim that these factors have resulted in an impending crisis, with 40 per cent of universities expected to end this year in the red. In response, vice-chancellors have called on the government to increase per student funding by £2,000 to £3,500 a year. This could take the form of a higher tuition fee cap or increased teaching grants. Yet, either way, taxpayers will be the ones picking up the tab.
In practice, tuition fees are mostly paid for through student loans which are bankrolled by taxpayers. About 65 per cent of the 2023/24 cohort will repay these loans in full. However, the repayment rate for previous cohorts was much lower, at just 27 per cent last year year.
Overall, higher education funding is generally a net positive for taxpayers due to increased tax revenue from a more educated workforce. However, there are caveats which indicate the funding model can be improved, including reducing the cost to taxpayers while incentivising both universities and students to make more efficient choices.
There is significant variation in the value of undergraduate degrees, which ought to be reflected in the funding model. At the top end of the scale, degrees like law, economics and medicine have substantial lifetime returns, more than £250,000 for women and £500,000 for men. Yet, in many cases, these graduates pay the same capped fees as those studying subjects with zero or negative lifetime returns, like creative arts and languages.
Fees for these subjects ought to be uncapped and allowed to rise to match their actual value, with the continued provision of student loans for the whole amount ensuring students do not face higher upfront costs. Of course, students would eventually have to pay the loans back. But given these degrees' net lifetime returns, they should reasonably be able to afford it. Specialty doctors - those with a minimum of four years of training after medical school can expect to find themselves in the top 95 percentile of earners, for example. This ensures that the cost of a degree is borne by those who derive the greatest benefit, with taxpayers facilitating the transaction rather than subsidising it.
On the other end of the spectrum, one in five students - around 70,000 each year - have negative net lifetime returns, meaning they would have been better off had they not gone to university. These are concentrated within less selective universities and degrees with poorer job prospects. Students certainly have the right to choose these degrees, but given the scale of challenges facing the public finances, taxpayers cannot afford to continue providing loans that are unlikely to be paid back. Of the £88.8 billion owed in student loans in 2018, the government estimated that £27.5 billion would have to be written off.
In order to deliver better value for taxpayers, loans should be contingent on programmes meeting specific graduate outcome criteria. If a degree does not make a student better off, taxpayers should not subsidise it. Making the actual cost of these degrees clear to students will encourage them to pick an alternative path that is more likely to lead to greater employment opportunities and financial security.
Different fees for different degrees is not a radical idea. In Australia, for example, a degree in visual arts from the University of Sydney costs around A$11,100 a year, while an economics degree costs A$16,323. Reforming higher education funding in this way would be fair to students and taxpayers and beneficial to universities and the economy.
Higher fees for certain subjects would see universities receive more money and provide them with an incentive to increase their intake for those subjects, resulting in more graduates being equipped with in demand skills when they enter the workforce. This is critical considering the country’s shortage of STEM skills. At the same time, placing conditions on which subjects are eligible for loans would ensure that taxpayers are not subsidising degrees and universities that fail to provide valuable returns for students and taxpayers.