October 13, 2010

Higher Education: Who Else Should Pay?

Writing about web page http://hereview.independent.gov.uk/hereview/report/

A Browne study

The Browne report, Securing a sustainable future for higher education in England, says higher education should be paid for by those that benefit from it: our graduates. It also says they should pay later, in easy instalments, and only when they can clearly afford it, with all risk transferred to the government and universities.

It looks to me like a no-brainer ... Yet lots of people are showing signs of moral outrage.

A question the critics seldom address is: Who else should pay for my degree?

The taxpayer is usually implied. But here's the problem: tax-financed higher education involves a lot of poor-to-rich redistribution.

Robin Hood in reverse

Today's students are a large chunk of tomorrow's wealthy. Today's taxpayers, in contrast, extend well into the ranks of the poor. In the UK, you start paying income tax at an annual income of just £6,475. Under the Browne proposals, student loan repayments won't kick in until annual income reaches £21,000. If the graduate's income doesn't make it to that dizzy height, you pay nothing.

Somehow or other, there are people who figure it's fair for the guy on £6,475 to start paying for someone else, but not for the guy on £21k to start paying back. (If you take expenditure taxes into account, which everyone pays, it's even worse.)

I'm sad to see clever people, like Warwick's own student representatives, dressing up in the mantle of social justice to call for poor people to go on paying to make others richer than the payers will ever be.

They say that one thing clever people are good at is defending the indefensible. Is it them or is it me? Well, the reader can make that choice!

Better than a mortgage

The private net present value of a degree, according to an interesting but underexplained chart in the Browne report, is at least £100k (the actual figure shown is a bit over $200k, which is useful for international comparisons, but still confusing). If you include the "social contribution" from today's taxpayer, then it's a little more. For the sake of argument, let it be £120k.

Warwick University Students' Union puts the likely burden of student "debt" (I'm putting it in quotes, because it's not real debt like a mortgage, where they come after you if you can't make the payments*) under Browne arrangements, at "well over £40,000."

That sounds bad. But, the last time I checked, £120k minus £40k would still leave around £80k to enjoy. Nice.

* A roof over your head is a more fundamental right than higher education. Millions of working families, who have not had the benefit of higher education, take on much larger sums of mortgage debt in order to own their homes. If their incomes fall and they have to skip payments, they must sell up or risk repossession. Don't you think they'd jump at exchanging that for "debt" on the terms proposed by Browne?

And finally

My experience is that student finance is the one topic that attracts lots of comments. Feel free to say what you think. Right now, I don't promise to reply. That's not because I don't care or don't have an answer. It's because I've got to turn away from this to earn my salary! And do some teaching!


- 17 comments by 3 or more people Not publicly viewable

[Skip to the latest comment]
  1. Mathew Mannion

    I’m not sure the value of a degree can be seen as a constant over all degrees. Obviously if you’ve got a degree from Oxford, that has more value than a degree from, say, Derby, does it not?

    A logical outcome of a “free market” degree system, at least as it seems to me, is that people pay more for a degree that has more “net value”, and that would seem to be the most likely thing that will happen if the recommendations of the Browne report become reality. Students pay £12,000 per annum to go to Oxford, whereas students pay maybe as little as £3,000 or £4,000 to go to a “lesser” University, or rather, one where the value of the degree that the student comes out with his less perceived value than one from a more expensive University.

    One figure from the Browne Report that interested me – though I have to admit that it came from a summary provided by the BBC as I haven’t read the entire report – is that given the assumption of an 80% cut in the teaching grant to Universities, the “break-even” point where Universities receive the same amount of funding per student is to charge somewhere between £6,000 and £7,000 a year. Surely, though, if Oxbridge students are paying £12,000 p/a and others are paying substantially less, that leaves Oxbridge, and probably most of the Russel Group, significantly in the black if the report is enacted. At the same time, Universities who are forced by this “free market” to charge much less, lose out – and the gap in education quality becomes even more stark than it may be at the moment.

    Since students from a poorer background are almost certain to take the cost of their education into account when choosing which University to apply to, would that not mean that the quality of your education is now determined by your social and economic status, rather than ability?

    13 Oct 2010, 11:31

  2. CLYDE MCAULEY,M.D

    Mathew,assumes that having an Oxford degree automatically means greater sucess,thats not necessarily true,it means that he or she have a leg up in future life,a student from Derby has the same potential for the future,it doesn’t mean that he is at any disadvantage.With the wide range of educational opportunities in the United States,going to an Ivy League school gives the head start to the student,but in no way guarantees sucess.Recent studies show employers prefer graduates from so called lesser schools. I like the BROWNE APPROACH!

    13 Oct 2010, 22:22

  3. Steve Rumsby

    Is there any analysis of the value to the country as a whole of having university-educated citizens? I’ve not seen this mentioned at all, and yet it seems quite important.

    14 Oct 2010, 17:11

  4. Henry Stelling

    Congratulations to Steve Rumsby. Many have forgotten or are unaware of what the GI Bill, following WW II, did for the United States. By supporting education for veterans, the government found that this educated group was the engine of economic growth that benifited all, especially the poor.

    14 Oct 2010, 18:51

  5. Mark Harrison

    Thanks for the comments.

    To Matthew: Your argument looks reasonable but your conclusion rests on two unstated assumptions (1) Students from a poorer background won’t be clever enough to factor in benefits as well as costs (2) Universities will not be motivated to recycle some fee revenue back into access scholarships. Not only are access scholarships part of the Browne framework but universities will do this self-interestedly; otherwise they would risk losing out in the competition for talented students. Both assumptions (not one or other) are required for your conclusion to hold water.

    To Steve: Yes, there is research on the return to higher education. It tends to show that the return is large in the United Kingdom (but also highly variable across degree subjects). This is a benefit to society as well as privately to graduates. But to justify a public subsidy you need evidence that social benefits exceed private benefits. There doesn’t seem to be consistent or robust evidence of this. A recent working paper (George Psacharopoulos, “Returns to Investment in Higher Education: a European Survey,” Higher Education Funding Reform Project, CHEPS-led consortium for the European Commission, March 5, 2009) compiles figures suggesting that the general pattern across European countries (including the UK) is for the social benefit to fall below the private benefit. Possibly, public subsidies to higher education are a reason for the shortfall.

    To Henry: The U.S. Servicemen’s Readjustment Act of 1944 (the GI Bill) was motivated by the desire to give something back to veterans for their wartime sacrifices. No doubt it was sensible to do it this way, because it also averted the risk that an entire generation of young men would skip college. It is widely over-hyped; the figure generally quoted (”$7 back for every $1 spent”) adds together estimates for additional output and additional tax revenues created, which would seem to involve double-counting. The extra tax revenues are a benefit only if we exist to serve the state, not the other way around. The figures do not tell us whether there was a social benefit above the private benefit. So, interesting but not directly relevant.

    15 Oct 2010, 13:13

  6. Steve Rumsby

    to justify a public subsidy you need evidence that social benefits exceed private benefits

    Surely to justify a public subsidy you just need evidence of social benefits. The level of that public subsidy would be determined by the balance between social and private benefits. Again, I appreciate it is hard to put numbers on this, but if, for example, you could show that society benefited about as much as the individual, then you might say that public subsidy should be 50% of the cost. But for sure society benefits to some degree (pardon the pun), and so should contribute some of the costs. And yes, that may well vary between subjects.

    I haven’t seen figures comparing the proposed fees to what it actually costs to provide a University education. Clearly the government isn’t proposing to reduce its contribution to zero, but I’ve no idea what proportion of the actual costs it currently covers, and is proposing to cover in future. Is that information anywhere?

    15 Oct 2010, 13:34

  7. Jackie B

    Let’s see, shall we?

    One of the most expensive careers to go into right now is to become a barrister. Even after a university degree, you still need to have lots more money behind you to train for the bar, or to be able to borrow plenty to cover the costs. Banks are very willing to lend money for this sort of career development – because once you make it, you’re going to be very well off indeed. So, using the Browne argument, there’s no disincentive for people from poorer backgrounds to take this career path – in fact, I bet they’re all over the law courts, aren’t they?

    Err, no. They’re not.

    Slinging a millstone around someone’s neck with the promise that over a 40 year career they’ll be better off if they carry it isn’t going to convince anyone for whom money is an immediate concern to take this route, much less a 17 year old applicant. I definitely wouldn’t have done it. I’d have taken a school leaver job and looked to the Open University to take a degree later in my career.

    I think the best education should be free to the brightest minds, regardless of their ability to pay later. And I’d be willing to pay higher taxes to cover exactly that.

    I don’t believe the universities will make much effort to attract the brightest students unless they’re forced to – it’s much easier to take the cash from people who can easily afford to pay. Look at how few universities actually use their own entrance exams, despite the homogeneity of A-level results amongst people from the same socio-economic backgrounds. Plus poorer students will be more likely to take jobs during term-time to cover their living costs – increasing their drop-out rate and making them less attractive to admissions tutors.

    If you want to cut the overall cost of higher education, cut the number of university places and redesign A-levels to measure aptitude rather than parental income. Focus on getting the best students into the right universities – quality not quantity.

    15 Oct 2010, 15:38

  8. Mark Harrison

    To Steve: I apologize if I was unclear. A private benefit is also a social benefit, since private persons are members of society. Higher education creates large benefits for society, but once graduates have received their income there is little or nothing left over. To justify a public subsidy, you need evidence of social benefits over and above the private benefit. According to the studies I mentioned, the net social benefit is no more than and sometimes less than the private benefit.

    The government subsidizes tuition for home and EU students on most university courses at around £3,800 a year. My guess is that this will go to zero or near zero for everything except health and science.

    To Jackie: The “Browne argument” is this. If I borrow from the bank, I must make fixed repayments out of an uncertain income; the risk falls entirely on me, the borrower. But, if I borrow from Student Finance, I repay only what I can afford, when I can afford it. The risk falls entirely on the lender. It is hard to see the social barrier in that.

    15 Oct 2010, 15:51

  9. Steve Rumsby

    I had understood “social benefit” to mean “benefit to society beyond that to the individual” – what you call the “net social benefit” above. I’d be staggered if that was 0 for any degree course, but of course in this age is going to be higher for science & technology degrees than for arts degrees. My point is that where it is greater than zero, that surely justifies some level of public contribution?

    How you measure the social benefit, I have no idea, and concede it is probably quite hard, which may account for the fact that current studies can’t provide hard facts. I still can’t believe claims that the net social benefit is less than zero, though. That just seems wrong, and suggests that maybe not all benefits are being taken into account. Still, I’m no expert!

    This is a fascinating discussion…

    15 Oct 2010, 16:08

  10. matthew

    Mark: are you in favour of public funding of the NHS?

    If you are, presumably you can make an argument which concludes that the social benefit of, say, a hip replacement operation is greater than the private benefit to the recipient of the hip?

    16 Oct 2010, 18:28

  11. Mark Harrison

    To Matthew: Good question. The public funding of the NHS rests on not one argument but two (at least).

    The public funding of hip replacements (and perhaps remedial interventions generally) does not rely on social benefits in excess of private benefits. It is based on a couple of presumptions, both of which have to hold: that it is cheaper to insure risks by sharing them than for each person to save up against them; and that compulsory public insurance, paid from taxes, is cheaper and/or fairer than private insurance. The case for risk sharing is fairly self-evident; if it did not hold, private health insurance could not exist. The case for public versus private seems more likely to vary over countries, periods, regulatory arrangements, particular conditions, and preferences over social justice.

    The existence of social benefits in excess of private benefits provides the basis, not for hip replacements, but for preventive interventions such as immunizations and disease control generally. Immunizations, for example, benefit not only immunized persons but also those that come into contact with them.

    Higher education isn’t a risk, so the insurance argument doesn’t apply. That’s why it comes down to the evaluation of social versus private benefits.

    19 Oct 2010, 19:01

  12. Matthew

    I am unconvinced by your argument. Essentially you seem to be saying that Browne style tuition fees are such a good investment for 18 year old potential students that they won’t be put off by them. In your response to Mathew you hint that you believe that poorer students are ‘clever’ enough to weigh up costs and benefits. But what is your evidence for this belief? Hasn’t thirty or more years of psychological research on decision making taught us that people (of all cognitive abilities) are extremely non-normative when it comes to making such decisions. Perhaps importantly in the context of worrying about poorer students, people are also strongly influence by short term wealth when it comes to assigning value to commodities (eg http://eprints.ucl.ac.uk/15008/1/15008.pdf).

    I think that for your argument to work you need to not only argue that a rational agent wouldn’t be put off by large fees (which is essentially what you’ve argued above), but also that 18 year olds are rational. I think that there is plenty of evidence that this latter assumption is incorrect.

    19 Oct 2010, 22:38

  13. Mark Harrison

    I understand your point. At the same time, I think the reference you point us to is not completely relevant. It is an experimental study of the value people set on avoiding painful electric shocks. Painful shocks are chosen for the treatment, “based on the idea that they are not generally encountered in daily life (cannot be related to any existing commodity or price), and hence prior price-related information cannot be brought to bear.” So, perhaps, not like charging for education?

    While I understand that there are limits on rational calculation, and these limits are probably more binding on decisions that have a long time horizon, underinvestment by some potential students is not the only risk that matters. There are also risks in too much paternalism and the government telling citizens what is in their best interests.

    For the sake of argument, however, consider the following propositions

    • Fee-based higher education is an excellent investment for those that are academically qualified.
    • Some potential students may be put off because certain, near term costs are more salient for them than uncertain, long term benefits, even if the central estimate of the benefits is a multiple of the costs (both in present values).

    Given that, what should we do? Here are some suggestions:

    • No upfront burdens on students or their families; no one has to save up or depend on family sacrifices to go to college.
    • Loan-based finance, but remove all risk from the student by requiring repayment only at an affordable rate when graduate income has risen significantly above the median.
    • Additional means-tested grants for students from low-income backgrounds.
    • Replace confusing institution-specific bursaries with grants at a flat rate from a single source.
    • Improved guidance in schools and better information about both costs and benefits.

    Oh – wait. Somebody already thought of these! They’re all in the Browne report. In fact, my only original contribution might be to add:

    • Student and academic lobbies to stop issuing scary, confusing warnings of graduates struggling under unbearable debts, instead help inform their constituents about what the Browne report actually says.

    20 Oct 2010, 10:49

  14. matthew

    I agree with you that the reference I gave is not completely relevant, but actually I think the differences you point to add problems for your argument, rather than reduce them.

    Essentially the Chater position is that people base their economic judgements on rapid comparisons with similar experiences. So the reason I’m willing to pay £2.70 for a cup of coffee is not that I’ve rationally weighed up the utility I get from the coffee (which is probably a cognitively impossible task) but rather that I know that that’s not out of line with what I’ve previously paid for coffee. The paper I cited demonstrates that, in the absence of such prior experiences (in the case of pain pricing), people’s judgements are heavily biased by their short term disposable income.

    As you point out, the case of tuition fees is different to both coffee and pain. Whereas everyone has experience of paying for coffee before, and few people have experience of paying for the absence of pain, all 18 year-olds have experience of getting education for free (perhaps with the exception of privately educated children who have a keen grasp of their parents’ finances). Probably someone ought to do the experiment to see what happens (well, I suppose the Tories are doing it as we speak), but my guess is that tuition fees will either be like pain (i.e. the free education students have had before is seen as somehow different, and so won’t be used as a comparison) in which case you’d probably expect short term disposable income to be an important factor in potential students’ decision making; or, even worse, the value of tuition fees will be judged by comparing them with the free education everyone has been used to. Either way, I think that both cases have big implications for equity.

    All that said, I think your point about the scary warnings coming from student lobbyists is well made. But, at the very least I think you have to accept that the effect that large tuition fees have on the decision making of poorer students is an open empirical question which no one really knows the answer to. My view is that the government ought to have worked out the answer before implementing the policy.

    PS. I’m interested that you raised the issue of paternalism, as this seems to be implicit in the Browne/CSR approach. See, for example, the withdrawal of all teaching funding for non-STEM subjects, and government imposed A Level entry tariffs:
    http://www.timeshighereducation.co.uk/story.asp?sectioncode=26&storycode=413931&c=1

    21 Oct 2010, 11:00

  15. Stephen B

    Mark, if you’re so concerned about the poor being unfairly treated through the tax system, then have wealthier citizens contribute proportionately more in taxes and exclude the poor from having to do so. We can have a special ‘education tax’ – the wealthier elements in society pay more, the poorer pay less or not at all.

    28 Oct 2010, 10:31

  16. Mark Harrison

    To Stephen: We have a tax system that is progressive, at least in principle, and I don’t have a problem with that. On your logic, I should exploit that to ask the government to pay for my house and car.

    On average, tomorrow’s graduates will be better off than taxpayers today. Tax-funded higher education takes income from taxpayers today and gives it to tomorrow’s graduates. It redistributes income regressively. Why would we ever want to do that?

    28 Oct 2010, 20:58

  17. Matt,

    Are you persuaded by HEPI’s analysis that shows that the govt’s proposed system will actually make no significant savings for the taxpayer, and may actually cost more than the status quo?

    See: http://tinyurl.com/34rh9u9

    23 Nov 2010, 11:09


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Mark Harrison writes about economics, public policy, and international affairs. He is a Professor of Economics at the University of Warwick. He is also a research fellow of Warwick’s Centre on Competitive Advantage in the Global Economy, the Centre for Russian and East European Studies at the University of Birmingham, and the Hoover Institution on War, Revolution, and Peace at Stanford University.



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