Government figures for tuition fees policy 'wrong' – Report

The UK government has got its sums wrong and could end up making no savings from increased tuition fees in England and Wales, an independent think-tank claimed this week.

The Higher Education Policy Institute (HEPI) warns that the new fees policy will have one or more of the following consequences:

• • Future taxpayers will need to pay more.
  
• • Other parts of the higher education budget will need to be cut.
  
• • Student numbers will need to be held down even further than currently planned.
  
• • Former students will have to repay more.

Report authors John Thompson and Bahram Bekhradnia conclude that the government's calculations depend on “highly uncertain and optimistic assumptions” and will be largely wiped out by the incidental impact on the way state benefits are calculated.

In The Cost of the Government’s Reforms of the Financing of Higher Education, they argue that as student loans are one of the items used to calculate the official inflation rate, the proposals will lead to a rise in the social security budget and therefore increased government spending.

“If we are right, the effect will be to reduce any savings from the new policies, and could even mean that there are no savings to be had,” they say.

The report argues that only part of the equation is known – the fees that universities are already charging (including the fee charged net of waivers).

The exact distribution of fees, how many students take out loans, and how much they borrow over their course is as yet unknown, and the first repayments only start in 2016.

The authors note that there are suggestions, as yet unconfirmed, of reduced demand as a consequence of the fees policy. They say that if demand does fall and the number of loans decreases, the government will make savings.

But they have a different view: “We have reviewed the evidence and concluded that though too early to be sure, there is no good evidence to expect a significant demand reduction after the immediate effects of the introduction of higher fees.”

HEPI has revised upwards its estimate of the average net fee from £8,228 (US$13,220) to £8,234 and says it thinks the government would be mistaken to believe that controls on student numbers will result in pressure to reduce fees.

“Most universities will judge their higher fee levels an asset in recruiting these students.

“It seems that the government is going to absorb the costs of the higher than expected fees [estimated at about £370 million a year], mitigated by an unstated policy of not up-rating them at all and allowing the real value of the maximum fee to fall.”

The White Paper that ushered in the scheme quoted a cost to the government of the loans made to students of 30%, but at the time the Department of Business, Innovation and Skills (BIS) quoted 32% for full-time student loans and 65% for part-time.

The cost represents the proportion of the loan outlay that will never be repaid – the so-called resource accounting and budgeting (RAB) charge.

The discrepancy amounts to some £190 million per year. Current official estimates have settled on 32%, dismissed by HEPI as “optimistic”.

The original “implausibly high” assumption for earnings of £99,500 a year 30 years after graduation has been revised downwards, to £76,500. But the new BIS model continues to assume an average fee loan of £7,579 against HEPI’s most recent estimate of £8,234.

While the impact of reduced long-term earnings assumptions and fees that are higher than assumed is not as great as might have been imagined, HEPI says there are other, even stronger reasons for concluding that the estimate is uncertain, and in general optimistic.

It suggests that evidence that the earnings of newly qualified graduates have seen very low growth in recent years, even in cash terms, means that at least for the early years of the scheme, repayments will be lower than expected.

It says the most doubtful assumptions are that the ‘career’ growth in earnings that most graduates are estimated to have enjoyed historically will be repeated, and that the distribution of income between high- and low-earning graduates will remain the same, when evidence in fact shows a widening gap.

Authoritative estimates of the cost of the plans have reached 37%, and HEPI believes that this is in itself optimistic. The difference between a 30% cost and 37% is £0.68 billion a year.

The impact of the inclusion of the new tuition fees is included in the calculation of the index used for the annual up-rating of state benefits and civil service pensions, and could be as high as £420 million to £1.14 billion a year.

The higher figure would wipe out most of the £1.3 billion annual savings that the reforms were projected to make.

The HEPI report concludes: “One of the main justifications for the introduction of these reforms, was that they would reduce public expenditure, reduce government borrowing, and put the future funding of higher education on a sustainable footing.

“There may be other arguments in their favour, but this justification does not stand up.”

HEPI says the government is “implementing a policy about whose cost, on its own admission, it can have no clear idea and which is potentially building up large liabilities for future generations to redeem”.