The vice-chancellors of universities in England and Wales recently called for a rise in tuition fees.
There are several reasons for this requirement. In the face of a decade of falling real pay for university staff, pressure from unions for a higher pay deal is mounting. Energy costs are reaching unprecedented highs.
The current tuition cap of £9,250 in England has been in place since 2017 and the government plans to keep it frozen until 2025. With inflation now at 10%, this means that by 2025 there will effectively be a long-term cut in incomes per student by about a third.
A major rise in tuition fees in the near future to £12,000 or £13,000 a year, as suggested by the eminent academic and founder of the University of Buckingham’s medical school, Karol Sikora, looks increasingly inevitable.
This is despite the government only presenting its current plans for the future funding of higher education in February this year. The government’s plans are for a lower salary threshold for student loan repayment, longer repayment terms (40 years instead of 30) and a tuition freeze.
So what will higher tuition actually mean for students and for the taxpayers who ultimately subsidize higher education?
Greater cost to the taxpayer
The average student loan in 2021/22 was £46,000, made up of around three years of full tuition at £9,250 per annum and three years of maintenance loans of £6,000 per annum.
Under the current system, a student earning a starting salary of £40,000 a year with annual pay rises of 2.5% would not repay this loan. They would pay a total of £84,000 over 30 years, of which £54,000 was interest, leaving almost £16,000 unpaid.
An increase in fees to a hypothetical £13,000 a year would result in the same repayments worth £84,000 over 30 years, but almost all of it would be interest on the original debt. A £56,000 debt would remain unpaid after 30 years, with the taxpayer footing the bill. Even with the repayment period extended to 40 years, £12,000 would remain unpaid and written off.
Of course, this assumes that maintenance loans (which cover student living costs) are not affected, which seems absurd in today’s economic environment. The final amount owed and the amount left unpaid is likely to be even higher.
However, loan repayments are notoriously difficult to estimate in the future. Inflation, interest rates, rising annual incomes, and changes in work and life expectancy all affect repayment calculations.
According to current loan repayment schedules, only about 20% of students are expected to repay their student loan in full. This effectively turns their tuition and associated loans into a graduate education tax on everyone else.
The government’s planned changes to repayment schedules from 2023/24 will increase this figure to just over half of graduates repaying their debt in full, but this figure is likely to fall again if fees rise.
Therefore, increasing the level of nominal pay would mean that around half of graduates would pay more and for longer. But the other half won’t actually be affected as they won’t be paying off their debt in full even at their current pay level. Instead, it would shift more of the cost of higher education to taxpayers.
Doubts about the university
Perhaps the biggest risk of increased fees would be that higher debt and potentially higher lifetime repayments would deter talented young people from less privileged backgrounds from going to university. We know that debt aversion is strongest among those with lower household incomes, and so there is a real risk to social mobility if fees are seen as prohibitively high.
On the other hand, allowing the amount of per student income universities receive to be eroded by inflation, amid all the other rising costs they face, is likely to lead to some universities having to cut places, cut courses , to merge with other institutions or, in extreme cases, to close their doors permanently.
These cuts would also be detrimental to social mobility. If there are fewer universities and university places, the remaining places are likely to go disproportionately to better-off students.
The question missing from the popular debate surrounding tuition is: are degrees worth it? The answer to this question is basic. It can change the perception of student debt too.
The short answer is yes. Although students believe that the current cost of university is poor value for money, graduating from university is still beneficial. By the age of 29, men earn 8% more than their non-college contemporaries. Women earn 28% more.
The Institute for Fiscal Studies has calculated that even after taking into account the higher taxes paid by graduates and loan repayments, the average financial return over the lifetime of a degree is £130,000 for men and £100,000 for women. These are significant returns and would cushion the impact of a small increase in the cost of tuition, so lifetime returns are likely to remain high whatever happens to tuition in the coming years.
This of course comes with the caveat that not all degrees will lead to the same earnings performance. Studying maths, medicine or economics is likely to lead to significantly different earnings compared to studying creative arts or social care.
The number of 18-year-olds in the UK is estimated to increase by 24 per cent between 2020 and 2030. This demographic boom will fuel increasing demand for higher education, and with the myriad of cost pressures facing universities, something’s got to give.
Given the returns still available, raising fees to support universities at this time is perhaps the way to go rather than risk the financial collapse of some institutions.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
Franz Buscha has previously received research funding from the Economic and Social Research Council and the Ministry of Education.
Matt Dickson currently receives funding from the Economic and Social Research Council and the Nuffield Foundation and has previously received funding from the Department for Education, the European Union and the Low Pay Commission.