“Study now, pay later”

The UK parliament has recently voted for the introduction of student fees as a way to fund the expansion in higher education. Could this be a model for other European countries to follow?
Economics Department

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University funding is hitting the headlines across Europe. In January the UK government only narrowly won a parliamentary vote to reform funding of higher education, after the prime minister, Tony Blair, put his “authority on the line”. Other European leaders will have been watching closely, as they also plan to revamp their higher education systems.

In Germany the government has already caused a political outcry by calling for universities to be able to charge fees and for the establishment of elite universities. In France, the government is searching for ways to improve university funding in response to a situation summed up by Le Monde as “La grande misère des universités françaises” (The desperate poverty of French universities). Similar complaints about overcrowded and rundown universities are common in Italy.

Underachievement and under-funding are damaging the competitiveness and performance of higher education in several European countries. Addressing these problems was at the heart of the UK initiative. There was broad agreement that change was inevitable, particularly as maintaining a skilled and educated workforce is vital for economic growth. The controversial question was over who should provide the money.

The total amount countries spend on higher education varies widely across the OECD. Those countries that spend more than 2% of GDP on higher education – Canada, Korea, New Zealand and the United States – are able to do so because they raise a substantial share of funding from students, donations and other non-government sources. By comparison, the major European countries spend about 1% of GDP and rely much more heavily on government funding, while the contribution of individual tuition fees is small or negligible. This partly reflects funding arrangements that were designed for a different era when only a small share of young people aspired to go to university.

However, over the last two decades student intake has climbed rapidly while competing demands on government expenditure have squeezed spending on higher education. Exceptions are Sweden, Finland and Denmark where expenditure on higher education is over 1.5% of GDP and is almost entirely publicly funded. However, tax rates in these Nordic countries are already high and public expenditure is likely to come under increasing pressure as their populations age. Thus even in these countries there is a case for reforms that enable universities to be less reliant on public funding, though it is less pressing than in the major European countries where such reforms may be essential to remedy current under-funding.

Greater financial contributions from students should be an important part of these reforms. The reforms in the United Kingdom will enable universities to charge fees of up to £3,000 per year. These fees should not only help provide more resources, but are a fairer basis for funding higher education too. After all, while the economy as a whole, including its businesses, needs skills to thrive, it is the students themselves who benefit most from higher education. In France, Germany and the United Kingdom, those with a university degree earn, on average, between 60% and 80% more than those without post-compulsory education and are also at a much lower risk of being unemployed.

Nevertheless an important concern is that high up-front tuition fees might affect access to education, particularly for lower income groups. The UK’s solution is to “study now, pay later”, thus allowing students to defer the payment of all fees until after they have graduated. Indeed, they will only be required to repay installments or “graduate contributions” when their annual income exceeds £15,000, so providing a form of insurance against the graduate becoming unemployed or finding only a lower-paid job.

Moreover, students from the lowest income backgrounds will be exempt from paying the first £1,125 of their fees and will be eligible for generous maintenance grants to cover living costs. Similar schemes have run for more than a decade in both Australia and New Zealand, and have not compromised access among less well-off students.

In New Zealand, since the introduction of student loans in 1992, participation in tertiary education has almost doubled, and the number of young people entering it is today the highest in the OECD. Moreover, the share of students from Maori and Pacific ethnic groups increased from 9% in 1990 to 24% in 2001. Australia introduced fees in 1989 and they have had little effect on the socio-economic mix of students.

Fostering wider access to higher education probably depends more on investments in early childhood and compulsory schooling. Much of the rise in education spending in the UK since 1997 has gone into nursery and compulsory education, with notable improvements in schools in more disadvantaged areas. For example, the number of schools where less than two out of three students reach the expected standard for 11-year-olds has been halved since 1996. Building on these improvements, while expanding higher education based on contributions from those who benefit from it, is the most effective way to improve equity in education.

One of the more controversial aspects of the UK reforms is that fees will vary both across different courses and universities. The intention is to provide a means by which the most successful institutions and courses can attract more funding. Experience from abroad suggests fees to study the arts may be lower than, say, for medicine, science and law.

Such variable charges may be more efficient to the extent that they better reflect both the relative costs of courses and the relative incomes which graduates will earn later. But it raises some thorny questions about whether certain courses judged important for growth, for instance, should be subsidised.

The New Zealand government, for example, is considering re-orienting public funding in order to encourage more students to sign up for courses in engineering, mathematic and computer science. Similarly there may be a case for supporting students intending to follow careers in key public services, such as teaching or health, which are expanding rapidly in the UK. But even in such cases it is preferable that any subsidy be explicit and targeted, rather than implicit because a uniform fee is imposed across all courses. While the UK reforms to higher education funding are an important step in the right direction, adding initially about 0.2% of GDP, expenditure levels will still fall well short of those in the United States. Higher education will therefore still face serious challenges and continue to rely on funding from stretched government resources.

Nevertheless, the UK graduate contribution scheme, following the previous experience of “study now, pay later” funding schemes in Australia and New Zealand, could be a role model for other countries in Europe. Such an approach is the fairest way to strengthen their higher education systems for today’s global knowledge-driven economy.

References

OECD (2004), Economic Survey of the United Kingdom, January. The part of the Survey addressing higher education funding together with further reading recommendations is available on the Survey homepage: www.oecd.org/eco/country_survey/unitedkingdom

©OECD Observer, No. 242, March 2004




Economic data

GDP : +0.5%, Q4 2014
Employment rate: 65.9%, Q4 2014
Annual inflation : 0.57% Feb 2015
Trade : -3.0% exp, -3.7 imp, Q4 2014
Unemployment : 7.022% Feb 2015
More moderate expansion ahead? Composite leading indicators
Updated: 23 Apr 2015

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