Philip Booth: How to raise fees the painless way

The case for requiring undergraduate students to contribute to the cost of their tuition is now widely accepted. Lifetime earnings premiums of between £100,000 and £200,000 from undergraduate study are typical and, whatever the merits of government support for specific groups of students, it is difficult to make a case that all students should have all their fees financed by the taxpayer.

Unfortunately the Government's mechanism for charging students has hit the buffers. Fees are now capped at £3,225 and the Treasury is frightened of the cap being raised. There are sound educational arguments for raising it. The fee cap leads to overseas students paying much more than home students, and this distorts university recruitment policies.

The cap leads to direct government subsidy of university places and this, in turn, leads the Government to restrict the number of places on particular courses, preventing successful courses from expanding and others from contracting. There is also an equity argument in favour of raising the cap – why should poor taxpayers pay for the education of those with much better prospects?

But the Treasury fears that, if the cap is raised, there will be an explosion of spending on higher education. The Government has to pay the fee up-front and only recoups it from students via a loan repayment over many decades. Thus, raising the fee paradoxically raises current government spending. It is not just this government that is trapped by this dilemma – understandably, given the state of the public finances, the Conservative Party has no appetite for raising student fees either.

Neil Shephard, a professor of economics at Oxford University, may have found a way to overcome Treasury opposition. In a proposal he made at a British Academy forum, and which will be refined in a paper for the Institute of Economic Affairs, he argues that universities themselves should be able to charge an additional fee that is paid back through the current student loans system. This would not count as government borrowing because the university would take the risk of default.

There are several benefits that could flow from this. Currently, all universities charge the same fee for all courses because it is capped at such a low level. Someone with a degree from a former polytechnic learning in huge classes pays the same as a Cambridge undergraduate with, more or less, personal tutorials.

If universities could charge their own additional fees there would be competition between courses and universities. Yes, mass tuition in a course of doubtful academic rigour may not lead to such high potential earnings as a course in economics at the LSE – but the fee would be less too.

As such, the Government would have to set the maximum additional fee at such a level that some universities will want to come in below the maximum – perhaps at about £3,000. Over time, the maximum additional fee could be raised and, indeed, uncapped. After all, there is no cap on fees for Masters degrees – competition determines the fees in a very effective market serving a variety of needs.

The mechanism for repaying the additional fee is important. Shephard argues that it should be subordinate to the current fee so that students do not start to repay it until they have paid off the government-set fee. Graduates would also repay the fee only if they earned £15,000 per annum or more.

It would be a long time before universities received significant income from this new funding stream but they could borrow against it, and Shephard also suggests that parents or students could be allowed to pay the fee up-front if they chose to.

Either way, the universities would receive a long-term, ring-fenced revenue stream from the repayment of deferred fees. This income would more realistically reflect the cost of higher education. Incentives would also be aligned in ways that were beneficial to both universities and students: if universities had a poor reputation for teaching, students would go elsewhere – possibly taking courses with lower fees.

Even more pertinently, if a university did not have a good reputation for academic standards, the long-term job prospects of its students would be poorer and the university would be less likely to receive the income-contingent, deferred fee.

Overall, this mechanism seems like a sound, pragmatic way forward: competition should be effective; standards should rise; universities will be more independent of government funding and the poor will still be subsidised. Not only that, Sir Humphrey in the Treasury will be happy – whoever wins the election.

Professor Philip Booth is the editorial and programme director at the Institute of Economic Affairs

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Education

Recruitment Genius: Senior Textiles / Fashion Technician

£22000 - £27000 per annum: Recruitment Genius: To contribute to the day-to-da...

Recruitment Genius: Health and Social Care NVQ Assessor

£17000 - £23000 per annum: Recruitment Genius: It is also essential that you p...

Recruitment Genius: ICT Infrastructure Manager

£27000 - £30000 per annum: Recruitment Genius: This Edinburgh city centre scho...

Recruitment Genius: Plumber

£30000 - £31000 per annum: Recruitment Genius: An independent boys' school sit...

Day In a Page

The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

Gaping hole at the heart of the European Union

Treatment of Greece has shown up a lack of genuine legitimacy
Number of young homeless in Britain 'more than three times the official figures'

'Everything changed when I went to the hostel'

Number of young homeless people in Britain is 'more than three times the official figures'
Compton Cricket Club

Compton Cricket Club

Portraits of LA cricketers from notorious suburb to be displayed in London
London now the global money-laundering centre for the drug trade, says crime expert

Wlecome to London, drug money-laundering centre for the world

'Mexico is its heart and London is its head'
The Buddhist temple minutes from Centre Court that helps a winner keep on winning

The Buddhist temple minutes from Centre Court

It helps a winner keep on winning
Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate
Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'