Report

Higher Education funding: what’s the problem and what are the potential solutions?

This report from UK think tank CEPEO looks at the problem with higher education funding and the potential solutions.

England’s once world-leading Higher Education (HE) system has become increasingly fragile over the last decade, with students suffering from real financial hardship, and some universities rumoured to be on the verge of collapse.

Back in 2012, it was all looking so good. While the near-threefold hike in tuition fees (from £3,000 per year to £9,000 per year) implemented that year was controversial, the income-contingent loan system at its heart ensured that students from any background could go to university and universities were adequately funded. Along with our colleague Judith Scott-Clayton, we evaluated the 2012 system in our paper The end of free college in England (Murphy et al., 2019) in which we studied the system’s impact on three key measures of success: enrolments, equity and funding per student. We showed that enrolments had held up in the face of the significant fee increase, and while the gap in participation between rich and poor students remained stubbornly wide, fears of a collapse in enrolment among disadvantaged students failed to materialise.

Moreover, university funding per head, which had fallen to dangerous levels in the years leading up to the reforms, was slowly beginning to recover. The success of the system (by these measures at least) came down to i) injecting cash into the system through tuition fees and, ii) the well-designed income contingent loans system, which ensured that no student had to pay upfront fees, and everyone had enough money to live on due to generous government-backed maintenance loans on offer. The system protected against key market failures — credit constraints, risk and uncertainty and debt aversion — an economist’s dream.

So where did it all go wrong? In short, with the government’s decision not to index-link tuition fees and maintenance loans. The tuition fee cap has only been allowed to increase once, by just £250 a year, since 2012. The net result is that it is now worth around 30% less than it was in 2012.

This is challenging for universities, which rely on fees as a key component of their income. And it’s equally difficult for students — maintenance loans — the key source of income for living costs — have not kept up with the UK’s high rate of inflation, causing student hardship.