Incentives and University Finances

Now that the London Olympic Games are over, apparently judged by most to have been a resounding success, it's time to get back to business and think about our universities and how they operate.

Focusing on the reforms to university financing shortly coming through in England, with most universities set to charge much higher fees (mostly at or close to the legally set upper limit of £9000 per year per student), it is quite striking how little the government seems to have understood about incentives, both for institutions and for students.

Institutions
Universities naturally want to pull in student numbers, as that is where the bulk of their funding will be coming from, via the tuition fees. For home and EU students, the fees will either be paid up front, in cash, if the student's family so decides and has the necessary wherewithal; or a student loan will be taken out covering both the fee itself, and often the bulk of living costs. Where student loans are used, the university gets the full fee right away, and so has no need to worry about so called 'non-performing loans'.

But what about repayment of these loans? As noted, individual universities don't need to be concerned, but the Student Loans Company certainly does. For graduates who remain in the UK and work, repayments are collected by HMRC through their income tax returns, with any outstanding debt written off after 30 years. No repayments are made until a graduate is earning at least £21,000 per annum. Even with pretty decent administrative arrangements in place to collect these repayments, it is estimated that about 30% or so of outstanding student debt will never be repaid - due to low earnings, spells outside the labour market, and default. In the end, this shortfall will need to be picked up by the taxpayer, via the government's budget.

Now, this outlines the situation for UK students who continue to work in the UK after graduation. For UK students who work abroad, they still formally have an obligation to repay their loans (and this would catch up with them if they returned to work in the UK at some point), but it's not clear that there is any sort of enforcement mechanism in place to make that happen. Likewise for students from other EU member states. They, too, have an obligation to repay, but how can they be compelled to do so short of expensive and complicated court action in various countries? So the more pragmatic of these students might well conclude their their education at an English university is essentially free. Again, our taxpayers end up footing the bill.

The effect of all this has already been twofold:

(1) Universities have mostly felt free to set their fees at or near the maximum level, contrary to the government's stated expectations.

(2) The government has felt obliged to cap some elements of student numbers to constrain the possible public spending costs of the new student funding system.

I'm not convinced that the new funding model will prove to be viable for very long, so in a few years' time we can expect another round of re-thinking, one that will, I would hope, pay a bit more attention to institutional incentives.

Interestingly, the way in which universities deal with non-EU overseas students, at either undergraduate or postgraduate level, is totally different, and far more sustainable. For with students in these categories, we have had high fees for some years already and student loans are generally not available from the UK's Student Loans Company. Hence not only is there no contingent liability for the taxpayer to pick up, but institutions have to take great care to make sure they get their money. Normally, for instance, we don't even allow such students to register and start their courses until all or most of the fee is safely 'in the bank', and in the few cases of default students are unable to graduate (we don't allow anyone to graduate while in debt to the university), and their debts are pursued through the courts to the extent possible.

Students
Aside from deciding to pursue their higher education at an English university, young people have several other options:

(1) They can choose to get a job, either in the hope of getting training through work and possibly going to university later, or simply because they judge it to be a more suitable option for them than university.

(2) They can take a university course in another EU member state, benefiting from much lower fees. Increasingly, European universities are offering many courses taught in English, the academic quality is often high, and such overseas experience can often look very good on someone's CV (especially if another language is learned along the way).

(3) They can go to the USA for their higher education, which has the advantage of a common language (more or less). Fees are high, especially at the really good institutions, but the new high fees being charged in England might well push some students in that direction (if their families can pay).

(4) They can consider the rapidly expanding range of distance learning and online options to take their education forward. This is a huge topic in itself, and I'll return to it at a later date.

For now, the main point is that potential students have lots of options, and their choices are going to be influenced by the incentives they face, including both the fee levels, and their perceptions of the likely wages different types of course might lead to (though I must admit I hadn't a clue about that when I was a student myself!). Hence in designing policy, some attention ought surely to be paid to student incentives, too.