New university funding scheme will cost more, claims HEPI

David Kingman analyses a report from the Higher Education Policy Institute (HEPI), which echoes IF’s claim that the coalition’s higher education reforms will be more expensive than previous arrangements

 The Higher Education Policy Institute (HEPI) recently launched a new report which looked at the impacts of the coalition’s recent reforms of higher education. Entitled The cost of the Government’s reforms of the financing of higher education, its main claim was that the recent reforms will actually turn out to be more expensive for taxpayers than the previous system of funding, despite the fact that they were introduced in order to save money.

Faulty projections

HEPI argued that the costs will turn out to be higher for three reasons.

Firstly, the government will have to lend more money up front to students than it forecast, because universities are charging higher fees than they had predicted. Although universities are now allowed to charge up to £9,000 per year (with some caveats), the government estimated the average would be £7,500. However, in the first year under the new system, the average has actually turned out to be more like £8,234. This makes a very large difference when spread over hundreds of thousands of students.

Secondly, people are unlikely to pay back as much as the government projected they would. Once someone graduates the amount they will pay back each year is linked to their earnings; people who earn less than £21,000 per year pay nothing at all, while the highest rate of repayment doesn’t kick in until someone has an annual income of £41,000. The government estimated that the typical male graduate will be earning £71,000 per year in 30 years time, and based its estimates of how much would be repaid on that figure, but HEPI has argued this is too optimistic.

Thirdly, university tuition fees are part of the basket of goods which the Consumer Price Index uses to calculate inflation. The increase in tuition fees will add 0.2% a year for the next three years to CPI, meaning inflation-linked benefits and pensions will receive an additional increase. The annual impact of this change is estimated to somewhere between £0.4 billion and £1.1 billion per year.

False Accounting: why the government’s Higher Education reforms don’t add up

The HEPI report echoes many of the same concerns raised by IF in an earlier piece of research, False Accounting: why the government’s higher education reforms don’t add up, conducted by Dr Andrew McGettigan.

Both reports reached largely the same conclusion that the government’s changes to higher education funding, although instigated as a deficit reduction strategy, may well end up producing almost no real savings for the taxpayer. There is even a chance that the reforms could end up costing more money than the system they replaced.

HEPI argues that the total difference between what the government thought the new system would cost and its actual cost could be as much as £1 billion a year. The authors make the following claim:

“This sort of cost would very largely eliminate the savings that the Government claims its policies will generate of £1.3bn a year. A slightly higher [repayments] cost or a slightly greater inflationary effect than the most optimistic that we have considered here would mean that the present policy is actually more expensive than the one it has replaced.”

If the new system does end up being more expensive than the one it has replaced, then the likeliest solution would be either be cuts in student numbers or an increase in tuition fees, as well as changes to the student loan terms for existing borrowers which would make them pay back more.

Of course, it will be years before anyone knows whether the new system is actually more expensive or not. But the way things are going, it’s hard to see it as an improvement for students, who will still end up paying more for their education regardless.

Posted on: 9 November, 2012

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