Business economics

An assessment of the system of financing public universities in England

Introduction

University education in England like in other parts of the world faces a lot of challenges. These challenges include financing challenges, inadequate student support especially from poor and disadvantaged backgrounds and worries about falling standards (WOLF, 2001). Financing of public universities is largely regressive since beneficiaries are from well-off backgrounds whereas funding is drawn from general tax payers many of whom have not studied and will never study at these public universities (BARR, 2005). After decades of increasing government funding, financing of public universities in England was virtually nationalized in 1987 by the Education Reform Act of 1987. This act introduced centralized planning in public university financing (BARR, 2005). It introduced a student loan and grant scheme and to finance university tuitions fees and meet living costs. The loan and grant scheme was mainly to be managed by the Student Loan Company (SLC).

Current Status

University education is an important ingredient in the economic growth of a country and is also a major determinant of a person’s chances of improving his/her standard of living. University education is costly and is one of the areas targeted for the current budget cuts. The main goals of the government in university education have been enhancing quality, access (especially among the disadvantaged) and affordability (HALL, 2011). Higher Education Funding Council for England (HEFCE) is the body mandated by the government to allocate funding to public universities. Government funding to public universities is aimed at supporting quality and diversity in teaching and learning, enhancing student retention and participation and enhancing activities geared at knowledge exchange. The financing is also aimed at enhancing the universities ability to play a leadership role in world class research (HALL, 2011).

The overall government support to public universities is in form of direct government grant funding and publicly funded student loans. Going forward the government plans to reduce HEFCE funding for teaching and increase public universities income through tuition fee loans(BARR, 2005). The government intends however to continue funding research that has strong economic significance through the UK Research Partnership Investment Fund. The current financing which is planned centrally imposes a standard fee for all courses of a maximum of £3,000, student loans that cover up to the full fee and some living costs and grants that meet the needs of the disadvantaged students. The new dispensation will see student paying loans of between £6,000 to £9,000 due to increase in tuition fees (BARR, 2005; HALL, 2011). Students will be able to access these loans from Student Loan Company (SLC) which is the institution that has been processing student financing requirements inform of loans. The government provides interest rate subsidies and even writes off loans that remain outstanding for some time (BARR, 2005).

 Merits of the current system of financing public universities

The current system of financing has many merits which include affordability and accessibility. Since students tuition fee is set at a certain upper limit then students from poorer backgrounds can be able to undertake courses that they could otherwise been unable to afford. If variable fees are set then some courses will be out of reach of students from poorer backgrounds even if they are talented (BARR, 2005). The current system in which students pay loans after they start earning enables them to access university education for “free” initially. Students are even given grants and/or loans by the Student Loan Company that meet their living expenses while at the universities. This enables students from traditionally disadvantaged backgrounds to access university education (BARR, 2005).

If the universities demanded upfront tuition fee payment before joining university many students from poor backgrounds would not have been unable to access university education. The other merit of the system is expanding access to university education. Due to provision of loans to students from poor backgrounds to pursue university education enrollment to university institutions has skyrocketed over the years (WOLF, 2001). This would not have been possible had the government withdrawn funding to public universities. Many of the universities have been able to enhance tuition facilities by putting up new tuition blocks and upgrading existing facilities to be able to handle larger numbers of students (BARR, 2005).

Increased university enrollment of students from poor backgrounds has also reduced income inequalities. This is due to the fact that university graduates are able to get high paying jobs which increase income levels among the poorer households and help to reduce income inequalities (WILLIS, 1982). Chronic income inequalities are known to cause social tensions, increase in social vices and ultimately social unrest and revolutions like was recently witnessed in northern African countries of Tunisia, Libya and Egypt. The current system of financing university education therefore improves disposable incomes among the poorer and more populous households which increase consumption levels in the country (RUSSELL, 2008). This has the effect of increasing demand of goods and services which ultimately has positive benefits to the economy. These benefits include increased gross domestic product, increase in foreign direct investment levels, high levels of new capital formation and reduction in unemployment levels (RUSSELL, 2008).

The current system enhances affordability and increases access to university education. According to generally known laws of economics once prices fall demand increases and vice versa. The new funding dispensation which is going to see government funding reduce and tuition fees increase will still not hamper access and affordability (RUSSELL, 2008). This is so because students aspiring to join public universities will still access loans and grants from Student Loan Company to pay the increased tuition fees and meet living expenses while at the universities. The changes will still ensure students still enjoy free university education “initially” since they will be required to pay the loans after they complete university and get into employment (The Economist, 2010). Even then those graduates who will be unable to service their loans for a period of about 25 years will still have their loan balance forgiven.

Students will still be benefiting from interest rate subsidies from the government which will save them from the effects of inflation rate fluctuation. Students will still benefit from a waiver of the effects of time value of money on their loan balances. This is because at the time they start repaying their loans the value of one sterling pound at the time they were given the loan will not be equivalent the value of a sterling pound at the time of repaying the loan (WOLF, 2001). The loan will be much less in real terms at the time of repaying the loan due to effects of inflation on the value of money. The current system ensures students loans repayments are Income-contingent in nature (The Economist, 2010). The loan repayments are calculated at a certain percentage of the borrowers’ subsequent earnings which are collected together with income tax. These loans have built-in insurance which cushion the borrowers’ in the event they are unable to repay.  This greatly eases the effects of the loan burden on the student’s future earnings.  Borrowers are also protected against making unsecured loans since the loans are collected alongside income tax (BARR, 2005; WOLF, 2001).  The government therefore aids borrowers in paying their loans by providing an easy system of loan repayment of the student loans. These loans are a form of affirmative action for disadvantaged groups in the society.  The loans and grants are large enough to ensure they cover the entire fees and living costs which in effect make higher education free at the point of utilizing the funds (BARR, 2005).

Demerits of the current system of financing public universities

Notwithstanding the seemingly plausible benefits enumerated above, the current system suffers from serious flaws. University education cannot be said to fully generate public benefits, in fact it confers private benefit to individual graduates. The chief beneficiaries of university education are the individual students who receive university education as they are able access better opportunities than the rest of the public who have not received the education (BARR, 2005). There is no proof that these graduates benefit the tax payers in any way from the education that they receive.  The current system therefore utilizes public taxes to confer private benefit to a few citizens who decide to go to university for their own private benefit. This is even unfair considering that those who pay these taxes never get to receive university education in their lifetime (The Economist, 2010)

The other notable demerit is that the loans have an interest subsidy attached to them i.e. interest on the loans is zero rated. The effect of this is that borrowers end up repaying loans that is of a lesser value in real terms than what they received at the point of use (WOLF, 2001). This is because a loan of £3,000 taken in 2008 is of a lesser value if it paid in 2013 because of the time value of money. Due to inflationary pressures on the currency over the years the basket of goods that £3,000 could have bought in 2008 will be drastically diminished in 2013.This therefore means that borrowers repay less after they complete university than they actually should. This is a clever way of robbing public coffers and can only be termed as embezzlement of public funds in a grand scale considering the number of beneficiaries (RUSSELL, 2008).

The interest rate subsidy that the government gives on the loans also does not achieve its objective as it results into shortage of funds which affect quality and access. The universities are unable to access funds to employ adequate teaching staff which affects quality. Due to inadequate funding, teaching staff are poorly enumerated which leads poor morale and contributes further to deterioration of standards. Due to limited access  students mainly from well off backgrounds get admission places at the universities which again crowds out the students from poor backgrounds which affects accessibility among the poor (PEACOCK, 2000).

The other demerit of the current system is that SLC is unable to fully access the risks associated with these loans. This increases default rates as many beneficiaries default in repayment. It is impossible to effectively follow up beneficiaries to ensure they repay on time. This leads to the Student Loan Company recording high default rates which leads to loan rationing and giving loans to students from well off backgrounds which crowds out the students from disadvantaged and poor backgrounds (RUSSELL, 2008).

Conclusion

The system of financing public universities in England is not the best available choice for society because of a number of factors. Firstly, it amounts to defrauding the tax payers because students end up repaying loans at initial principle only without taking into consideration the time value of money t the time they start repaying the loans.. The loan repayable should in effect be adjusted upwards to take into account the time value of money (WOLF, 2001). The system confers private benefit to individual graduates using tax payers’ money. This is unfair because most tax payers do not receive university education and also may not take their children to these universities due to one reason or another. The next injustice is that most of the beneficiaries of university education are individuals from well off backgrounds who are able to finance their university education from personal resources but instead are financed by poor and overtaxed ordinary citizens (PEACOCK, 2000).

 

 

 

References

BARR, N., (2005). FINANCING Higher Education.Finance & Development, 42(2), pp. 34-

37.

Britain: The posh, the poor and the pushed; University finances. (2010). The Economist,

394(8674), pp. 6465-65.

HALL, M., (2011). Guest editorial: the end of the British public university? International

Journal of Law in the Built Environment, 3(1), pp. 5-10.

PEACOCK, A., (2000). Public financing of the arts in England.Fiscal Studies, 21(2), pp. 171-

RUSSELL, V., (2008).Universities’ admission policies to be made public.Public Finance, ,

9. 9.

WILLIS, D.K., (1982), Feb 17. British universities get crash course in Margaret Thatcher

budget-cutting. The Christian Science Monitor.ISSN 08827729.

WOLF, M., (2001), Apr 16. Mediocrity flourishes when an inspector calls: British

universities will soon fall far behind their US counterparts thanks to the malign effects of state funding and regulation. Financial Times, 17.ISSN 03071766.

 

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