University Fees - Just How High Can They Go?

Posted by David G. Evans

Education is something that everyone should have access to. We believe in a basic level of education for all, but that doesn't mean that everyone should go to university. Instead it should be available for those that want it. Rising costs are forcing many to rethink the decision, but the questions we want to answer are what will the cost be when our young children are looking to enter and what can we do about it?

Years ago tertiary education was seemed a basic necessity and therefore provided by the state. Society benefits from a more educated population, while government coffers benefit from higher tax revenues. Things changed In the UK in 1998 with the introduction of university tuition fees - intially capped at £1,000 a year, which became £3,000 in 2004 and tripled again in 2012 to the current level of £9,000. Your average 3 year university degree now costs a student £26,000 in tuition fees (not including books, cost of living, grants etc).

There is talk of increasing this cap beyond £9,000 (which we view as a question of when), particularly as the government appears to be so bad at managing the process and estimates that 35-40% (£16-£18 billion) of current student loans will never be repaid. Who is going to foot this bill? Currently it is you and I - the tax payer. There is an initiative to privatise the scheme, however estimates of what the student loan book could be sold for are well below what the government would like to achieve (i.e. a big loss for us taxpayers). Forecasts see the loan scheme growing to £200 billion by 2042, with a projected write off to the tune of £90 billion (for reference £46billion was the price tag for the government bailout of RBS).

Let's put the ideological discussion of whether it is fair to charge students for education aside and accept it as fact.  In a time of fiscal restraint, students make up a small percentage of an ageing population so are easy targets (despite recent events) . Further there is the argument that university is privilege not shared equally so why should everyone bear the cost. Regardless we do not see them going away any time soon. 

National Union of Students: Living Costs


Tuition is just the start of the problem for our dear students. According to the National Union of Students (NUS) students need to additionally budget for an annual cost of living of £12,160 (or £13,521 in London due to higher rents). We would argue that many of these costs are not really related to University as you still have to eat, clean etc regardless of what you are doing. Renting is a debatable point, particularly given the number of 30 somethings still at home so we'll leave that up to you to decide.

The future

These numbers are concerning if you are a student who is about to enter university life, but what about those who are some way off. What about the parents who are thinking ahead, perhaps up to 18 years ahead and fearful of the prospect of a 30-something financially incapable of moving out of the nest? Where does one start? 

Can we assume that if fees have tripled on both occasions, this rate will continue ad infinitum? This last increase implies an annual increase of just under 15% which compares to an average inflation rate for the same period of 2.9%. If you're a child born today, would you be looking at tuition fees of over £100,000 per annum? Safely we can say this is unrealistic.

Why unrealistic - because the changes we have seen in tuition fees are not due to changes in the cost of educating or with the profit margins of the university. Rather they are as a consequence of the government transferring the cost to the university (reduced funding) which ultimately ends up with the student. What is the real cost of education? Number vary and it is hard to get a precise figure but we have seen £7,300 from Higher Education Funding Council for England (HEFCE) and £6,280 from the Department for Business, Innovation & Skills.

Press and awards004
Cost per Full Time Equivalent Student (BIS)

So. . . if you can educate someone for £6,280 and charge them £9,000 that's not a bad business, is it? So much for social benefit - this might be a new way to pay off our national debt! Further if we charge the students inflation + 3% on the loan, the fiscal benefits look even better!

Oh wait, what about the foreigners?

If it's profits they want then look no further than the cash cows of higher education. Non EU students can pay up to 4 times the fees of EU students. Why bother haggling over £9,000 or £16,000 when you can charge a foreigner £35,000 for exactly the same education. Currently there is no cap on the number of international students that can come to the UK but there is a cap on the total number of students that universities can admit (which is due to be increased by 30,000). Competition is fierce across the globe for international students for both their wallet and the benefits they bring, partly reflected in the drop the UK experienced this year.

But where does it stop?

If we conclude that higher education can be profitable (caveat that students actually repay their loans), what is it stop fees continually rising as long as someone keeps lending students the money? If Oxford claims that it costs them approximately £16,000 to educate each student will this be the next step? Will universities level the playing field to compete for Internationals students at the expense of British students? Are we going down the path of the US student loan crisis we read about?

If we take a look overseas - the US and Australia are 2 alternative destinations for english speaking students. No, we are not ignoring other continental European countries such as German where you don't pay tuition fees. If you speak German or enrol in an international course then this is a very good option but there is an ideological difference between the countries that is reflected in Germany's decision to eliminate the last of undergraduate fees in 2014. Consequently they provide no guidance as to where UK fees may go.  

The US example

The US college situation is (not surprising) complex, for a number of reasons. We all hear stories of huge 6 figure student debt, but that isn't the reality for all. Firstly there are public and private colleges. Private institutions such as Harvard are expensive. The current cost is $43,938 per year or $58,607 (approximately £35,000) including room and board.

BUT - here's where it gets complicated. US private colleges have large endowments (wealth funds) donated by previous attendees due to favourable tax rules. What this means in real terms is that if you are accepted to Harvard and your family earns less than $65,000 (£38,460) then your education is free.  [The average UK wage is £26,500].

Average US Student Debt: WSJ

The average cost of studying at a private US university is in the region of $30,000, whereas a local (within their state) student at a public university would only pay $8,655. According to the WSJ, $33,000 (£17,750) is the average student loan debt for bachelor degree graduates in 2014, up $3,000 (10%) from last year.

Then there is a second aspect that is worth bearing in mind. A larger number of students will go on and do a post graduate degree, typically an MBA (Masters of Business Administration) or a Masters. The cost and value of an MBA is a whole subject in itself, but needless to say they don't come cheap and are seen as a prerequisite for a career in many industries such as finance. This is often the cause of the excessive six figure student debt that is so often bantered around.

The Australian example

Australian university fees are based on degree based national bands, with students being charged between $A4,429 (£2,446) and $8,859 (£4,894). Australia also has a slightly higher ratio of international students (21%) compared to other english speaking countries UK (18%), Canada (13%) and US (3%).

Like the UK, Australian students can obtain loans from the government to fund tertiary education. These are indexed to the local inflation rate, but do not carry an interest charge or margin as we do in the UK.

What's the take away?

One conclusion is that there is no strong body of evidence to suggest that UK university fees are cheap compared to other countries. The examples that do are based on specific examples with different tax and funding structures so are not directly comparable. Further these institutions also provide a great deal of non repayable financial aid to offset their higher costs.

In the case of Oxbridge, the defence of their £16,000 claim is a significantly higher staff to pupil ratio than other universities. As staffing costs tend to be the largest cost of running a university, those with lower ratios will naturally have a higher average cost per student. Like Harvard, they also survive on contributions and donations to fund the gap. Other universities with lower cost structures would not be able to justify such a position.

University of Leicester - Income Pie Chart 2014

But lets put this into perspective - typically universities are non profit organisations. They don't have shareholders and they don't have an objective to maximise profits and dividends.  They have expenses which must be met with income from various sources.  Figures vary between universities, but tuition fees may account for only 50% of a universities income. The rest is generated from other areas including funding grants, research grants, trading activities and donations. If governments further reduce their direct funding, the impact would again likely fall on students unless universities could make up the difference from their other activities.

Where are we likely to end up?

What is clear is that different courses at different universities cost different amounts. A one size fits all strategy does't work and may only act to reduce the quality of the education system where it is needed. A Labour promise to cut tuition fees to £6,000 means an equal increase in government debt and shift to the tax payer. It may work to gain student votes but given the current economic environment may not be achievable and I would not plan based on that assumption.

With the press reporting that the government refuses to rule out further increases while Vice Chancellors bang the table demanding higher fees we need to understand what may play out.

UK RPI (Year on Year) : ONS

A simple option would be to index the tuition fee cap to inflation. This would mean that the real cost does not change and universities would not suffer effective spending cuts each year. This may be brought about through a formal mechanism or through a regular review process.

A second option would be to selectively increase the cap, depending upon the cost base of the institution. This would allow institutions such as Oxford to recoup more of their costs but not allow other institutions to unfairly increase fees for no reason other than uniformity. This may create more of a free market (supply meets demand) environment, but may also allow universities take their eyes off the ball somewhat and allow expenses to bloat.

A third scenario is that the government continues to cut grants and funding. With government debt rising and forecast to rise further, this may be seen as another opportunity to further shift the burden off the public purse.

UK Government Net Debt as % of GDP (ONS)

This may have a number of consequences. Firstly and most obviously it is likely to result in a further cost increase to students, but it may also drive the universities to seek an increase in higher fee paying international students. As the cost is substantially the same to educate both a domestic and international student, economics suggest that a lowering of the fees would initially increase the share of the international student market. In the long run this may be financially counterproductive and create a global price war to the benefit of the international student, but this is politics and money. 

Our position?

We don't see the government allowing universities to unjustifiably increase their fees, but we do view inflation indexation as highly likely and indeed fair. University costs increase with inflation so it is reasonable to assume their income should. Future students are theoretically no worse off as the real cost has not changed, despite what you will read in the press.

Similarly we view a more cost based approach as fair and equitable in certain situations. This already exists in so much as not all universities are currently charging the full £9,000 fee and the onus would be on universities to prove that they offer value for money. If it really does cost £16,000 to study at Oxford, then why shouldn't the "ordinary" recipient of such an education bear the incremental costs. There is a correlation between education, employment and salary, so the Oxford graduate should be better placed to repay a higher tuition fee. This of course relies on everyone having the same access to student loans, so as to ensure the wealthy are not able price everyone else out of the market and does not prevent the university or government encouraging certain areas through some form of subsidisation.

This raises the issue of student loans and the grant system, which we'll leave for another day. 

Finally the third option of further reductions in government funding we view as undesirable, but potentially unavoidable should the fiscal situation deteriorate significantly.

The conclusion we draw is that yes we believe that the cost of tuition fees will continue to rise over time but not continue at the current pace. Yes those not eligible for a grant can get a loan to cover the cost, but this comes at a price that does not create a level playing field. We also have not touched upon the cost of living as a student or the gap between Maintenance Loans (but will later).

For a child born today, we conservatively estimate that it will cost them at least £130,000 for a basic 3 year university degree, of which a large part will not be covered by tuition and maintenance loans. The ultimate advice we can give for parents and students that want to pursue tertiary education is that the sooner you have a plan to deal with higher costs, the better placed and more enjoyable the experience will be. 


Some further reading:

Channel 4 : FactCheck: how much does it cost to educate a student?

Independent : How the real cost of a degree is now £100,000 : Student Finance

Telegraph : Forget tuition fees – students can't afford to live



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