Monday, 10 July 2017

Cartel schmartel

The question of university tuition fees in England is causing brouhaha again. Part of the issue seems to be some Conservative ministers wanting to catch up on an issue where the Labour Party had the edge on them at the recent General Election. Part of the issue appears to be a Damascene conversion by Andrew Adonis, the behind-the-scenes architect of the 2004-06 increases in tuition fees, and in particular his assertions that universities are operating a cartel about fees. A particular trigger appears to be recent revelations about the amount of debt that students will incur and not repay

At heart, a lot of the issues appear to relate to the consistent £9k fee charged by universities in England. This costs more than the government planned (an estimated cost of £7.5k per student per year underpinned the calculations in 2010 and 2011). So why do universities charge £9,000 per year? And why do students pay?

(Cautionary note: although I graduated from LSE, I am not an economist. But I don’t think that arguments I make are bad arguments. Second cautionary note – the Higher Education and Research Act and the Office for Students changes a lot of the nomenclature in this, but the fundamentals remain the same.)

(by the way, on this general topic here is a really good article from the BBC showing some data about this complex topic)

Firstly, let’s look at the question of why students pay.

The student loans scheme in England is not like a normal loan. Repayments are contingent upon income levels (ie you don’t pay until you earn £21,000 per year; and then you pay a flat rate 9% of income over 21,000 per year.). You keep paying until you’ve paid off the debt, or until 30 years post-graduation.

This means that many won’t fully repay their student loans, as their income levels between 21 and 50 aren’t high enough to have paid for enough years. It also means that for any given level of income, the amount you repay would be the same regardless of the amount of loan you took out. Let’s show how that works:

Student A borrowed £9,000 per year - £27,000 in total – to fund tuition fees at Poppleton University. They now earn £25,000 per year, and so every year they repay £360 – that is, 9% of £4,000, which is the difference between their income (£25,000) and the threshold (£21,000).

Student B went to the Poppleton Metropolitan University which charges £6,000 fees per year, so they borrowed in total £18,000. They now earn £25,000 per year, and so every year they repay £360 – that is, 9% of £4,000, which is the difference between their income (£25,000) and the threshold (£21,000).
You can see that the annual amount of repayments is not related to the amount borrowed. Total amount repaid does relate – in principle – to the amount of borrowing, but you’ll only be expected to repay all of the debt if you earn enough.

This leads to my first proposition: the loans system does not encourage students to be price-sensitive.

The second question relates to why universities charge £9,000. It’s important to understand how this £9,000 is made up. The legislation provides for a standard amount (£6,000 per year) and a variable element (initially an additional £3,000 per year, now £3,250.)

Any approved English HE provider can charge £6,000 per year. Institutions can charge an additional fee if they have an access agreement with the Director of the Office for Fair Access (OFFA).  The Access Agreement sets out what additional fee they plan to charge, and what they’ll do to ensure that this does not militate against fair access. The assumption was that only in exceptional cases would £9,000 be payable; but there was no mechanism to enforce this. OFFA had to judge each application on its merits. And so if, say, University A had got an access agreement for £9,000 fees with fair access spend of £500 per student, then University B which proposed £9,000 fee with £500 fair access spend per student would be able to argue that to deny them the right to charge £9k would be perverse. The quality of the university was not a consideration.

In that initial round, nearly every university had its access agreement approved without conditions; a few had to make revisions. But none were turned down. £9,000 proved not to be exceptional.
Why did universities even suggest such a fee level? In part because fees act as a marker for quality. If your rival charges £9,000, why would you charge less? To do so could be to indicate that you weren’t as confident as your rival in the value of your offer.  It isn’t about greed or excess; simply about market position.

So this is my second proposition: there was no incentive for universities not to charge £9,000.

Also relevant was the actual behaviour of students. When setting higher fees for the first time, many university governing bodies recognised that they were entering the unknown. There was a recognition that student numbers might well fall. So a £9,000 fee, together within internal budgeting for fewer students, would make sense. We put on a brave face for the world, but plan for hard times. As it turned out, student numbers did not (after the first year) decline. And this is the third factor which I think is relevant.

Student recruitment has historically been controlled by the government, through a funding cap. Essentially, universities had a recruitment target set by HEFCE; there were penalties for exceeding this. When the cap was relaxed and then removed, as happened in 2013-14 onwards, universities were free to recruit as many students as they liked. This meant that a university which was growing could afford to spend resources on other activities, as in most cases the £9,000 fee was greater than the full cost of teaching. This enabled development of new subjects; investment in new buildings for teaching and research; and investment to improve reputation in, for instance, the REF.

This creates my third proposition: universities had many incentives to grow; few to remain the same size.

Put these three factors together, and a lot of the features of the current system become clear. £9,000 fees were the natural desire for universities. There was no price competition between universities, because enough students (in a growing market) were not price sensitive. So £9,000 becomes the norm.

This isn’t a cartel. Universities are by habit compliant with law and regulation, and the injunction ‘do not discuss fees with your peers’ was, in my experience, very well observed.  But it was bad regulation. The design of the system did not, beyond pious words, prevent £9k becoming the norm.

What would Nick do?
 Equally, universities had for decades been enjoined to behave more entrepreneurially. In relation to PGT fees, universities were encouraged to see these as a price, not a cost. Would students pay the fee? If so, charge it. If the fee wasn’t enough, stop teaching the programme. And this habit infused undergraduate fee decisions. It would be possible to regulate or legislate for a fee regime that reflected cost not market price. But this wasn’t done.

So what is to be done now? I’ve a simple plan. Ask Nick Barr. He’s Professor of Public Economics at LSE, knows more about higher education funding than almost anybody else in the world, and is wise and fair-minded. Ask Nick Barr how to fund students and universities on a fair and sustainable basis. And do what he says.

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