Bahram Bekhradnia: Raising fees is essential – but there will be losers

Although many people do not realise it, England introduced a system for funding university undergraduates in 2006 that is among the most progressive in the world.

It recognises that graduates have benefited from their higher education, so should pay. It involves no fee payment upfront so no one is excluded because of parental means. It ensures that no one is required to repay loans if they are not earning enough to be able to do so. It protects the position of women and others taking a career break by writing off loans not repaid after a period. It provides loans to cover board and lodging for all and it provides generous cash grants for poor – and indeed now not-so-poor – students.

All this is admirable. However, some of the features that make it so progressive – the universal subsidised loan, repayments of which are deferred and income contingent, for example – also make it extremely expensive for the taxpayer. The Government has estimated that it subsidises something like 33 per cent of the cost of the loans that it gives for fees. So the greater the total amount of fee collected by universities, at present, the greater the Government's financial commitment.

The review of the fee system in 2009 is eagerly awaited. It will be essential to have a review based on evidence, and many organisations – not just those with a direct and vested interest – are contributing to this.

The Higher Education Policy Institute (HEPI) today publishes a report that analyses some of the implications of raising the £3,000 fee cap. We don't argue whether such a raise would be just, and we certainly have not taken a view on the "right" level of fee, or on the question of whether the Government is right to subsidise loans. But we have looked at the cost of providing loans and assumed that the Government may not be willing to increase its commitment, even if it permits a higher fee to be charged in the light of the 2009 review.

There are actually only a limited number of options. The majority involve some move away from the principle of fully subsidised loans up to the maximum fee. Some students – perhaps all – would therefore have to pay more.

One option would be to use part of the fee income that universities receive to help pay for continued fully subsidised loans, at a higher level. Another would require students to pay part of the fee up-front. This would represent a major break with the principles of the 2006 reforms, which established that no student would have to rely on their family for any part of the cost of tuition.

Without quantifying the risk, our report finds that students from poor families are taking a greater risk than students from better-off families when they decide on higher education. For example, if future income does not reach expectations, that will hit students from poor families much harder than others. They are taking a greater risk in a very real sense: it is not simply a question of attitudes to debt. It is real and differential risk.

That, of course, is the case under the present fee regime, but will become more of an issue if fees rise, and will be particularly acute if the Government decides on some up-front payments. Some students will therefore need fee waivers.

One implication of providing such fee waivers is that they could eat significantly into universities' income from fees. That is more so for institutions with large numbers of students from poor backgrounds. The benefit from charging higher fees would be greatest for those universities with the fewest poor students.

It is impossible to discuss this issue fully without considering other forms of student support – particularly, bursaries for maintenance – which institutions are expected to offer under the variable fee regime. This is something that will be explored in a forthcoming HEPI report, but it is also something the Government will need to consider as part of its fee review.

All options are difficult. Whatever the decision, there will be major losers. If the fee cap is not raised, universities will howl. If it is raised – unless the Government is willing to increase the amount the taxpayer spends on subsidising loans – some students will have to pay real rates of interest on some part of their loans.

To mitigate the disincentive effects of this, universities will have to provide additional support for some students – probably quite a few – reducing the benefit they will derive from any increase in fees. There are likely to be losers all round.

The writer is director of the Higher Education Policy Institute