Economics: Time the campus went to market

THE USE of taxpayers' money to finance university and college education is one of the great middle- class con tricks of our time. It fulfils that least egalitarian of biblical principles: to them that already have, more shall be given.

Thousands of young people will receive their A-level results this week. Those who have donewell enough to win a university place will find that the Government pays the cost of their tuition and a large part of their living expenses. Because most graduates earn much more during their subsequent working lives than people who leave school at 16 or 18, this means that a relatively well-off minority is benefiting at the expense of the rest of the population.

People go into higher education for many reasons, but most are making a conscious investment in their future earning power. They sacrifice income during their period at college, believing they will more than compensate after graduation by obtaining a better- paid job than they would otherwise be qualified for.

Research by London Economics for the Committee of Vice- Chancellors and Principals shows just how lucrative an investment this is. Take a woman on median earnings, which means that half the population earns more than her and half earns less. Adjusting for inflation, she would start work at 18 on about pounds 8,000 a year after tax and national insurance. Her salary would rise to around pounds 14,000 by the time she was 49, before tailing off as she neared retirement.

If she went into higher education, she would have a lower take- home income while she was at university or college. But she would then start work at a significantly higher salary and thereafter see her earnings rise much more rapidly. By the age of 49 she would be taking home around pounds 24,000 a year, some 70 per cent more than her non-graduate counterpart.

Imagine this was an investment in which she 'saved' money during her years in college, which was then paid back with interest. The rate of return would be more than 20 per cent, compared with 3 or 4 per cent she could get by putting money in a building society.

Reality is admittedly more complicated than this simple example suggests. The fact that graduates have gone to college may not be the only reason why they earn more. For example, regardless of education, people entering the workforce from relatively well-off family backgrounds tend to earn more than those from less well-off backgrounds. One study found a rate of return to higher education of 25 per cent for the children of unskilled workers, compared with 6 or 7 per cent for the children of upper income groups.

None the less, for most potential students, higher education is financially more than worthwhile. But in large part this is because it is subsidised so heavily by the Government. Taxpayers fork out about pounds 6,000 a year for each student to cover tuition fees and the other costs of running colleges and universities. In addition they pay students living outside London a basic grant of up to pounds 2,040 a year to help cover their living costs.

Students will also be able to borrow pounds 1,150 a year from the Student Loan Company. These loans are paid back over the five years after graduation, in monthly payments that rise in line with inflation. Payments are deferred for those earning less than 85 per cent of national average earnings.

The Central Statistical Office calculates that state support for higher education predominantly benefits the poor rather than the rich. This seems plausible, because most students have comparatively low incomes during the period in which they are at college.

But, as the London Economics study showed, for most students this period of relative penury is only temporary. A study by economists at the London School of Economics argued that it was fairer to assess the distributive impact of higher education subsidies by assuming they were paid to the students' parents. It then turns out that the highest-earning 20 per cent of households receive around five times as much subsidy as the lowest-earning 20 per cent.

Sowhy does the Government not withdraw its support from higher education altogether? One argument is that society benefits, in addition to the student. Educated workers improve each others' productivity and speed technological progress, which in turn boosts economic growth. But these spillover benefits may be much less effective than the educational lobby would like us to believe. Martin Weale, of Cambridge University, calculates that increasing the proportion of 18-year-olds who go into higher education from its current rate of around 30 per cent to 50 per cent might only increase the underlying growth rate of the economy by about 0.08 per cent a year, with the full effect not feeding through for a generation. Raising this staying-on rate is far from cheap - plans to lift it from 30 to 33 per cent have already been postponed because they would add as much as pounds 1bn to the pounds 5bn higher education budget. So expanding the sector may offer surprisingly little bang for the taxpayer's buck.

More important, Government intervention can be justified because potential students cannot borrow enough from the private sector to cover the cost of their tuition fees and living costs while at college. Commercial lenders will not accept the statistical probability that a graduate will be a relatively high earner in the future as sufficient security to finance investment in their 'human capital'.

The introduction of student loans in 1990 was in part intended to address this problem. Most students are eligible for loans, whatever their financial circumstances. Nearly 350,000 loans were advanced in 1992/3, worth an average of pounds 656. Some 15,000 students who graduated last summer are in arrears with their repayments.

Thesqueeze on public spending is still intense and the plans to expand student numbers remain outstanding. So the Treasury has been looking again at the way in which the student loans system is run. It is coming round to the idea that students should repay their loans through a temporary surcharge on their National Insurance contributions, having been extremely hostile to the suggestion in the late 1980s. This should almost eliminate defaults and ease pressure on low-earning graduates.

Cutting defaults might also make the private sector more keen to provide the finance, perhaps through privatisation of the Student Loans Company itself. Alternatively, blocks of debt could be sold to financial institutions, such as pension funds, which are looking for long-term, low risk investments. Both these look better prospects than involving the high street banks, which refused to run the student loans scheme when it was first set up. Revenues raised from selling on students' debts should be deductible from the public sector borrowing requirement, which is an added attraction.

This sort of 'securitisation' of individuals' debts has already proved successful in the US. The market in mortgage-backed securities there has grown from dollars 400bn in 1987 to dollars 920bn in 1992, so that it now accounts for around 40 per cent of the US bond market. If debt backed by student loans was marketed here, then the Government would have to decide what risk should be attached to it and how much it should subsidise the students' interest payments. Supporters of the idea say that the market in debt backed by student loans could be worth pounds 4bn.

If the Treasury does back the repayment of student loans through the National Insurance system, then it would probably phase out student grants. Universities and colleges would also be allowed to charge 'top-up fees' that the students could pay through their loans. Top-up fees have so far been highly controversial, causing ructions at the LSE when they were suggested there, and costing Jeff Rooker his job as a Labour education spokesman last year when he dared to suggest they might be a good idea.

But there is no good economic reason why students should not eventually take out loans to cover all of their tuition fees and living costs. Universities could then be left to set tuition fees at the level the market would bear. This would allow them to compete for students from elsewhere in the EU, many of whom would pay handsomely to attend British universities but are currently forbidden. Universities could also differentiate themselves, with some offering high-quality facilities and world- class teaching staff at high cost, while others offer a more basic service at a lower price.

Provided the loans were widely available, for training places as well as university places, it would be both efficient and equitable. The Government could always offer subsidies in the form of scholarships: at least it would be more obvious who was getting the benefit.

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