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University funding is in crisis: here’s how to fix it

Since their introduction in the last twenty years, England’s system of tuition fees and student loans has become highly controversial. One can make several criticisms of the current structure. First, and most obviously, it encumbers today’s students with debt that they will struggle to repay over the course of their careers.

According to the Sutton Trust, the average student graduating in 2015 had debts worth some £44,000 – reportedly the highest amongst English-speaking countries. Interest on this debt currently sits just above 6% per year and, given that this rate is tied to the Retail Price Index, it’s likely to rise further in the future. Graduates are emerging from university already bearing a serious financial burden.

This acts as a perverse penalty to educational attainment, particularly under current conditions of uncertain employment and a distorted housing market. The increasing levels of student debt (already totalling £86.2 billion) is reflective of a broader trend of escalating indebtedness in the UK which places a great strain on our economy.

Unless drastic changes are made to the fees system, the majority of loans will have to be written off

Moreover, most graduates will never repay their loans in full, with the IFS estimating that as many as 70% of the 2016 cohort will still have outstanding debts by the time they reach the age of 50, when the remaining amount will be written off. In light of this, the accumulation of student debt will have serious repercussions for UK government finances in the proceeding decades. Unless drastic changes are made to the fees system, the majority of loans will have to be written off, representing a significant cost to the public purse.

Recent government action indicates that fees, and thus loans, will only increase over time for each successive cohort of students, exacerbating this problem. However, to strike at the root cause of the student debt problem requires a wider and more holistic perspective on the university system itself.

It should be noted that far more people go to university now than did in previous decades. To understand this phenomenon, one must treat university education as an economic good like any other. Before the introduction of top-up fees under the Blair government, this good was totally subsidised by the government. Even with the introduction of top-up fees and later full tuition fees, university education is still a heavily subsidised product.

Unsurprisingly, constantly increasing demand for higher education has… necessitated the introduction of tuition fees

Government subsidies tend to result in increased demand from consumers, who do not pay the proper market price for a product, and this is borne out by the story of British higher education since the Second World War. The participation rate, or proportion of school leavers going to university, was a mere 3.4% in 1950, and had only reached 8.4% in 1970. However, the last 30 years have seen a massive increase in this rate, which is now close to 50%. Unsurprisingly, constantly increasing demand for higher education has led to a situation where the sheer cost of the university system has necessitated the introduction of tuition fees and student loans.

If, as this article argues, the current system is unsustainable, there are two realistic options to resolve the crisis in university funding. The first is to revert to the system of the 1950s and 1960s, in which university is free, but entry is restricted to a small minority of academically gifted individuals – between five and ten percent, for example. Under this system, most school leavers would enter work immediately or pursue other options like shorter vocational courses. As one recent audience member on Question Time put it, entry to university should be ‘academically difficult, but financially easy.’

The market mechanism will determine what an acceptable level of tuition fee is for a given university

The second, and perhaps more radical option, is to abandon government funding for higher education altogether and open the entire system to the efficiency of the free market. Without government subsidies and loans, universities will have to compete against each other to demand fees that are competitive and acceptable to the consumer – in this case, students. Since most students are dependent on their parents, 60% of whom do not see the current level of fees as good value for money, the numbers of young people attending university should decline before reaching a lower equilibrium. The market mechanism will determine what an acceptable level of tuition fee is for a given university, and transfer student debt from the public to the private sector.

Either of these two options would go a long way towards solving the issues faced by the current system. However, since neither major party seems interested in either course of action, it seems that the student debt crisis will continue unabated.

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