Higher Education: Funding

Lord Desai Excerpts

Wednesday 27th October 2010 Lords Chamber

[Lord Desai]

As the 25th speaker, I had better say something different from what anyone else has said. First, I very much welcome Lord Browne’s report. I have waited 23 years for something like this to happen. It has at last happened. In 1987, when I was on a summer holiday, my colleague Nicholas Barr sent me a paper in which he argued that all higher education undergraduate funding in the UK should be on an income-contingent loan basis. We all fell on it with amazing pleasure that at last someone had got something right.

As someone who had no education in this country—I was educated in India and the United States—I could not understand the inequity of British higher education funding, which allowed people from class groups A and B to swan around for three years, to get a degree and to move into the top two deciles of income, all at the taxpayer’s expense. Normally, of course, the taxpayer did not have the benefit of higher education. The middle classes, of course, beat their breast about low access levels, but they did nothing about the quality of secondary school education and therefore the situation continued.

The inequity of British higher education funding has been justified by the idea of externalities. Of course, if someone gave me a lot of money I would praise it as doing a lot of social good—of course I would. Why wouldn’t I? However, it is a fallacy to say that, because education has externalities, it should be funded in the way that we fund it. Perhaps that is partly true, but a part of education is being funded as long as we fund university research and capital expenditure that the undergraduates benefit from. Even after Browne, undergraduates will not be paying the true cost of their higher education.

Another inequity in the British higher education system that has been happening for the past 30 years is that non-EU students are the only category who pay the real cost of higher education. They pay £10,000. Even after Browne, we are talking about only £6,000—and everybody is saying, “My god, the sky is about to fall”. If the true cost is £10,000, why do we not charge £10,000 and get on with it? The nature of an income-contingent loan system is such that not only are there no upfront costs, but it is not like a mortgage. I am sorry to say that we have spent a lot of time devising this; I have put intellectual effort into it. It should not be like a mortgage, because the cohort pays for it, not the individual. Very importantly, it exploits the inequality of income outcomes among the graduates. By having a threshold and a proportionate share, eventually some people will pay more than they have borrowed while others will pay less. It is one of the most equitable systems that I can think of.

I hope that we go ahead with Browne, although, as I said, I have reservations about £6,000 being too little—and I am not making this up. In 1998, when the then Labour Government said that the level should be set at £1,000, I am on record in this House as saying that it should be at least £4,000. When they said that it should be £3,000, I said that that was nothing; it should be £7,000. I have been ahead of the curve—or behind it, however you want to look at it.

This is a good opportunity not to get stuck with £6,000. We really should find out the cost of educating an undergraduate. Come on, it is not rocket science. Then, let students have a transparent choice of how much they will pay through an income-contingent loan and let us see how much the poor taxpayer will pay for the whole thing. Let us also ask the taxpayers if that is what they want to do.

My noble friend Lord Giddens talked about the American system. I have always thought—since I was in America—that the American system was much more egalitarian than the British one. In the American system, you more or less have to fend for and educate yourself—banks give loans and people save or work while studying. The American system also has flexibility whereby you can take some credits now and some later. As my noble friend Lord Hunt pointed out, that is what gives the American system its strength.

British universities are silos. You enter and you make a contract for three years. You cannot escape and, if you do not finish the course, you do not get a piece of paper for it. You do not get any credit—you fail. They have taken your money and they have failed you, thank you very much. The education is also very narrow; there are no liberal arts colleges. That is why not a single Commonwealth country has followed the British model of higher education. Nor have they followed our way of financing it, but that is another matter.

If we get to the position of adopting the Browne system of higher education, profound changes may happen to the British university system. I cannot wait for it. I know people who say, “Competition is horrible. It is terrible”. We endure competition everywhere else. When it comes to Murdoch owning BSkyB and other television stations, we say, “No, we must have competition. We cannot let Murdoch have a monopoly”. I think that, similar to what the noble Lord, Lord Luce, said about Buckingham, competition might force some universities to specialise, to offer different packages and accelerated degrees and to give people a different kind of education. Universities should be different. One thing that I hold against the Conservative Government is that the great Education Reform Bill, as it was called, reduced diversity in the system by making all the polytechnics and CATs universities. Everyone started wearing gowns and flouncing around. There was diversity but it was reduced. We need more diversity. We need universities that offer only a few courses—maybe only humanities or social sciences. Why not? The LSE offers only social sciences and it is a perfectly good university. It may be that financial change will lead to much healthier changes in the British university system than there have been so far. I know that it always shocks the British mind that anything could be better than what we already have, but it is possible that we could have a better university system.

Another fallacy is that uniformity is equality. Uniformity is not equality. Even if there has to be a certain level of fees, there is no reason why every university should be forced to charge the same fee. In a debate some years ago, when we were discussing the 2006 rules, the noble Lord, Lord Quirk, said that perhaps universities should be allowed to charge an average, across all their courses. They could then discriminate, between courses, what they charged.

The crucial point is what the Government are willing to pay up front to the student by way of subsidy of the front-end costs. Let us say that the university can charge whatever it wants but the Government will subsidise only a £6,000 or £7,000 per year education. If Oxford, Cambridge or the LSE want to charge £20,000, they must find loans for the other £13,000, which will have nothing to do with the Government. That will leave a perfectly good system in which we do not have to tax universities for charging. There is no need for clawback. We could say that £7,000 is what the taxpayer will pay up front while we are financing the loan. If universities fancy themselves as Harvards, they must make arrangements for a particular loan package, which they will offer to their students. Those students will go to Cambridge, Oxford or the LSE because they believe that doing so will enhance their future income. That is why people go to university. They also go there for culture and so on, but actually they go for income. We could easily have a sort of cap on what the Government would pay, with universities then being free to charge whatever they wanted. That would simplify matters. It would force universities, as the noble Lord, Lord Luce, said, to seek endowments and funding of a different kind to help to subsidise the loans that students take out.

I wanted this to be done before there was any prospect of a cut in government spending. This change in the way of financing higher education has nothing whatever to do with the general budget of the Government. The Labour Government should have done it 10 years ago when we had the money. Had we done it when we were prosperous, there would have been fewer complaints. We did not; we lost our nerve. In 1997 I hoped that the incoming Government would adopt as policy our recommendation of an income-contingent loan system. They did not and the rest is history.

We have to make it quite clear that the grounds for doing this is equity—equity for the population, most of whom pay indirect as well as direct tax and most of whom will be on income levels that are well below what a graduating student would earn in his or her first job. An income of £21,000 may seem like peanuts to us but it is about the mean income and way above the median income. Therefore, a graduating student will end up in the top two or three deciles. We are not talking about poor people and certainly not about poor deserving people. The rich may be deserving, but I doubt it.

We have to allow lots of flexibility and allow universities to do different things. We have to make such packages that the only commitment that the Government have is the extent to which they will fund the income-contingent loan system. For the rest, we can allow the dreaded market to take care of it. If you think that the market is not a good thing, look at the United States. The chart on page 16 of the Browne report shows the proportion of graduates aged 25 to 34 against those aged 55 to 64. In most European countries, there has been a spread in the percentage, but not in America. Why is that? It is because historically Americans have been able to go into higher education in large proportions because they have a flexible, non-bureaucratic, non-government-funded system. That is the secret of achieving equitable higher education, which may be counterintuitive to most of us.