On Tuesday last week, Oxford University’s governing body – the Congregation – overwhelmingly backed a motion condemning the UK Government’s policy on higher education. The vote, 283 to 5, was interpreted as a “powerful symbolic blow” to Universities Minister David Willetts by the BBC.
For those unfamiliar with the context, last November, the new UK government announced its plans to reform how higher education in England and Wales is funded. A report from a group set up under the outgoing Labour government recommended abolishing a cap on fees entirely. The new Government, however, increased the ceiling for tuition fees from 2012 on from £3,300 to £6,000 and up to £9,000 “in exceptional cases”. (The phrase ‘exceptional circumstances’ effectively means that a particular university must use the extra money to widen access beyond “white middle-class teenagers”, as the Guardian puts it.)
The key feature stressed by the Government was that no-one would have to pay back until they started earning more than £21,000 a year. For reference, the typical worker in the UK earns £18,500 and if you earn £30,000, you’re in the top quarter of earners.
“Lobby group objects to funding cut”
Unsurprisingly, though, this was not a popular decision among students. “Lobby group happy with having funding cut” is a headline that is rarely seen. Perhaps equally unsurprisingly, most universities in England and Wales will indeed be looking to charge the maximum £9,000 off at least some of their students. The graph below shows the maximum fee to be charged by almost one hundred universities in England and Wales. They are sorted by the Guardian’s 2012 ranking and show a remarkable degree of homogeneity: only two of the top 40 universities by this ranking won’t be charging the full £9,000, while only two of the entire group will charge less than £8,000 at the top.
While some will look at this and shout collusion, a moment’s thought should reveal that this just doesn’t stack up. Only 10 of the lowest 25 ranking universities are charging the maximum, so clearly, prices are being used a selling point. However, it is significant that once the “£9,000 seal” was broken, it broke only to about £8,000.
It’s clear that a service as intensive in skilled labour as higher education is very expensive to provide. And it’s clear – from the actions of universities across England and Wales – that even £9,000 doesn’t cover the costs. Ultimately, the costs have to be borne, though. The only question is how.
Why both sides are wrong
“What’s wrong with the status quo?” current and soon-to-start students (and their parents) may ask. Unfortunately, if students themselves don’t pay for their education, then someone else has to. And in a country where only half of young people get a third-level qualification, that means that working class families have to pay for middle class and upper class kids to go to university. Surely, everyone will agree that this is not fair. With limits to the UK Government’s ability to spend, due to the necessity to close the deficit, it’s also not sustainable.
“What’s wrong with the proposed solution?” others may ask. The threshold for earnings is raised significantly, so access should indeed improve. At least on paper. And unfortunately, that’s where the problem lies: debt aversion. People don’t like making commitments about the future in an uncertain world. So even though the system is set up to be fairer, people actually think it’s more unfair. The focus is entirely on the headline £9,000 and the debt accrued, and not on the return that people get on education.
Indeed, this is a topic that has a much wider resonance than just higher education. Investor Bill Ackman summed up the Global Financial Crisis very neatly when he said: “There’s too much debt and not enough equity in the world.” If you give someone equity, it means you benefit and suffer along with them. If you give them debt, you’ll drive them to bankruptcy if you have to, to get your money back. If you sit back and think about it, this has been the root of a lot of the issues in the world economy over the past few years.
Replacing student debt with student equity
Can this type of reasoning be applied to higher education? Not only can it, it is actually being applied as we speak. A Colombian social enterprise called Lumni has helped almost 2,000 students go to university in Chile, Colombia, the U.S. and Mexico by offering them “human capital contracts”. How does it work? Effectively, Lumni provides you with the cash up front to attend college. In return, you promise to pay a certain percentage of your salary (say 15%) every month for ten years, once you start work after your degree. In corporate speak, “You, Inc.” has Lumni as shareholders, rather than a bank or the government as bondholders.
Because it’s a fraction of your income, whatever that income is, students are no longer worried about “debt burden” if they don’t get a good enough job after graduating. Instead, the question for the student is: “will I earn 15% more after I graduate than if I don’t go to college?” And the evidence says yes – research from the UK for people born in 1970 suggests that the premium for a good degree (a first or an upper second) is 22% for men and 25% for women.
By significantly raising the income threshold, and by tapering the interest rate, the Conservative-LibDem Government has already shown it is concerned about debt aversion. However, the general reaction suggests that there is considerable debt aversion based on headline fees.
The Government should consider, instead, a “debt-for-equity” swap: taking equity in students, rather than giving them debt. For someone who earns £25,000 coming out of university, an (arbitrarily chosen) 15% contribution for ten years would yield the Government £37,500 in real terms – more than £9,000 a year on a four-year programme. Meanwhile, the graduate enjoys a higher stream of income throughout their life, long after they’ve bought out the Government’s minority shareholding in them!