Page last updated at 02:17 GMT, Saturday, 12 December 2009

Who should pay for universities?

By Mike Baker

graduation ceremony
There are calls for students to pay more

This week's pre-Budget report has dramatically changed the nature of debate over what should happen to university fees - potentially one of the more explosive issues at the next election as we head towards 50% of all young people expecting to go to university.

Just as Lord Browne's independent review of student finance began its work, the outlook for future government spending on universities took a sharp turn for the worse.

While schools were picked out for protection in the chancellor's statement, universities now see their future funding draining away.

As Mr Darling highlighted schools, hospitals and Sure Start as the areas to be protected from the general funding squeeze, the implications for other areas of public spending began to sink in.

Sobering reality

As the Institute of Fiscal Studies (IFS) has identified, these other spending areas - including universities - now face a "severe squeeze" over the three years of the next comprehensive spending review. The IFS says it's likely to amount to a spending cut of some 16%.

This sobering reality was starting to sink in at a debate organised by the universities' umbrella body, Universities UK, with the aim of answering the question: "Who pays? - options for the future funding of higher education."

There is growing expectation that, whatever system of fees the review endorses, it will be students and parents who pick up the extra tab as government funding dwindles.

And that bill could grow considerably from the current tuition fee level of £3,225 payable by students in England, Northern Ireland and non-Welsh students in Wales.

Although there has been much speculative talk about fee levels rising to £5,000 or £7,000 a year, the conference heard a suggestion from the business world that the cap on fees should be removed.

'Lift the fee cap'

Sir John Chisholm, chairman of QuinetiQ, argued that "it is inevitable and desirable" that the fees cap was lifted. And, he said, "eventually the fees cap should go altogether".

Sir John, who also chairs the National Endowment for Science Technology and the Arts, said a market in university fees would benefit the system, making it "more attuned" to the needs of students and employers.

He said a real market in university funding might mean some universities going bust, as happened in the business world. With over 140 universities in existence, he said it was "strange that none has gone bankrupt".

While a complete free-for-all in fees may yet prove too radical a step for the student finance review, there is a growing feeling that it is now inevitable that fees will rise - which is why many are suspicious that the decision has been put off until after the election.

One proposal that appears to be gaining ground in the current financial climate is that, whatever happens to the cap on student fees, students should be charged a real rate of interest

But the current state of the national budget deficit, as highlighted this week, means a particular problem for any new system that is based simply on raising the cap on fees.

That is because raising student fees does not save the government money in the short-term. In fact, under the current system, it costs the taxpayer more.

That is because students are currently entitled to a government loan to cover the full cost of the fee.

The government only starts to get that money back much later, after the student has graduated and is earning over £15,000 a year.

There are two ways around this problem. First, the government could stop providing students with the loan and require them to pay the fees up-front.

That option would rule out all but the wealthiest students and is a political non-runner.

Shift change

The second way would be to charge students a rate of interest that reflects the true cost to the government of borrowing that money. At present, students pay a rate of interest that only covers the rise in the cost of living.

As Professor Nick Barr of the London School of Economics has shown this subsidy on student loans means that for every pound loaned to students, the subsidy costs the taxpayer another 30 pence or more.

So, one proposal that appears to be gaining ground in the current financial climate is that, whatever happens to the cap on student fees, students should be charged a "real" rate of interest (ie one that does more than simply cover inflation).

Professor Barr says there is no need to charge students a commercial level of interest, akin to credit cards or banks, but the rate should cover the cost of the government's borrowing, so that for every £1 it lends it gets at least £1 back.

The National Union of Students (NUS) continues to reject the current system of fees and loans altogether, but it has now accepted the principle that graduates should contribute to the cost of their degree.

Their favoured option is a graduate tax, with students paying up to 2.5% of their salary. The payments would go into a trust to ensure that the funds find their way back into universities, not into the government's general coffers.

This is a major shift for the NUS and has made them serious players in the debate about how to fund universities.

However, governments do not like the "t-word" and, moreover, are traditionally hostile to having any of their tax revenues ring-fenced for particular services.

At Friday's Universities UK conference, the NUS President, Wes Streeting, asserted his union's intention to take the battle over fees into key marginal seats where the student vote is particularly strong.

If the opinion polls start to point towards a "hung parliament", the debate over student fees could yet become a key election issue, despite the efforts of Labour and the Conservatives to kick it into the long grass.

Mike Baker is an education writer and broadcaster.

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