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Lucy Hodges: Degrees should cost far more

The desperate state in which universities find themselves – having to turn away 180,000 applicants this summer while still ending up with empty places – is the result of our highly centralised higher education system. It's the funding and admissions systems that have got us into the mess this year. As the Vice Chancellor of Liverpool John Moores University, Professor Michael Brown, wrote in The Independent yesterday, universities are stymied by a combination of fines imposed by the Treasury if they recruit too many students and an imprecise "Clearing" process that means they have to over-recruit to fill all their places. This year they won't be able to overbook as the airlines do.

Britain needs to move towards a much more flexible higher education system that is closer to the American model. As it is, our system is run on almost Soviet-style lines, where the number of places is fixed by the centre to keep costs under control. If universities were able to charge higher fees, as everyone expects the inquiry by former BP boss Lord Browne to recommend, universities would be better funded at a stroke. A graduate tax or "contribution", on the lines of the idea floated by Business Secretary Vince Cable, would not be the answer on the grounds that it would take forever for the money to come in and, when it did, it probably wouldn't end up in the universities' coffers anyway.

Graduates should pay closer to what it costs the taxpayer to provide their university education, so expect annual fees to climb to £5,000 or higher. We have a nonsensical situation in Britain where large numbers of highly educated parents in big cities such as London pay through the nose to send their offspring to private schools to secure access to state-subsidised universities. It should be the other way around, as it is in America. Acquiring a degree confers a huge private benefit on individuals – they earn a lot more than their non-graduate colleagues – so they should contribute more towards the cost of that.

But there's another essential funding reform that is needed: the rate of interest on student loans needs to go up. At the moment it is too low, which makes student loans very expensive to the Treasury. It is one reason why the mandarins are so keen to control student numbers. If the interest rate were set at a rate equal to the Government's cost of borrowing, the system would improve immediately. The hope is that Lord Browne and his team are going to tackle these funding issues.

That leaves the admissions system: reform has been mooted over the years to move us from a system based on predicted A-level grades, with a last-minute scramble at Clearing, to one based on actual grades. Attempts at reform have foundered on the intransigence of university admissions officers who have argued that institutions need time to choose between candidates and that this change wouldn't allow enough time. But various experts have come up with ideas. It should not be beyond the wit of Ucas and other organisations to bang heads together in the interests of finding a sensible solution.

A looser, more flexible higher education system in which graduates contribute more to the cost of their courses should put more pressure on universities to improve what they offer students. At the moment it is difficult for applicants to find out about courses, about where graduates on different degrees end up and about how much they earn. This is vital information for putative students. It needs to be published in a form that today's applicants find appealing, not in the dreary tables beloved of higher education quangos.

The Coalition government is behind this kind of change, as it is behind the development of private higher education institutions along the lines of BPP. And today's students are not bothered about whether they are studying at a public or privately funded institution: they want good teaching, decent facilities and, above all, a place at university.