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Funding UK Higher Education: From Elitism to Mass Market

What is the fuss all about?

The system for funding HE seems to be fatally flawed. It is attacked from all sides of the debate: on the one hand, student groups argue that it leaves them impoverished and facing long-term debt problems; on the other, it is expensive, hard to understand, as well as being an administrative nightmare.

Those in favour of student grants? © iStock.com

The system as it stands:

As we have seen, there is a system of student loans at present, to fund living costs and tuition fees; this system has been in place since 1998. There are four major flaws in the current way higher education is financed:

1. It is based on a rigid form of central planning.
2. It is too complex.
3. The size of the student loan is too small.
4. Student loans attract an interest subsidy.

Let's look at each of these flaws in turn:

1. Central planning
   In the U.K. higher education market, the government sets both the price and the quantity supplied.
   • Price is controlled through centrally-set tuition fees.
   • Quantity is controlled, as evidenced by successful universities being penalised for exceeding their target.
   • A bulky bureaucracy used to regulate the market.
2. Complexity
   The system is too complex:
   • Very few people understand it.
   • This makes it difficult to administer.
   • Its complexity leads to access being restricted.
3. Student loans are too small
   Students have low incomes, rely on their parents and have to work long hours to earn a reasonable income. As a result, they seek credit, which is often expensive. This hinders access to those from low income backgrounds.
   • Loans don't cover living costs.
   • Not all students receive the full loan.
   • Fees aren't covered by the loan, which means that there are currently upfront charges for higher education.
4. Student loans attract an interest subsidy
   The interest rate charged on student loans is equivalent to the rate of inflation. These loans, therefore, are charged at a zero real rate of interest.
   • They are, therefore, a very expensive subsidy, costing £800 million per year.
   • They are bad for access. Because of the expense of the subsidy, the loans are rationed in supply. As a result, they are too small in size.
   • They are deeply regressive, as those who gain most are successful professionals usually in mid-career.

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