All entries for Monday 23 November 2009

November 23, 2009

Student Fees: Four Myths and a Certainty

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Student fees are in the news again. These are the top-up fees paid by British and EU students to take degree courses at British universities, presently capped at £3,225 a year. They're called "top-ups" because they help to bridge the gap between the public money that goes to universities and the actual cost of degree programmes -- which is considerably more. So, should our universities be allowed to raise their fees? 

The government has announced a review. The lobbies are brushing up their arguments. Everyone has their opinions about the justice or injustice of student fees. As it turns out, fairness and economics are closely connected, but not always in the way that the lobbies think.

  • Myth #1: It's unfair if higher fees deter some young people from going to university.

Let's think about the choice that people make when they decide to study at university. There is a benefit and a cost. The cost is the fee, plus the time you have to give up to study. The benefit ... well, there can be a financial benefit if you get a higher paid job as a result, and you probably will: a recent goverment survey put the average lifetime graduate premium at around £150,000. Just as important, there can be non-financial benefits. These include having more time to grow up, geting better networked, having more rounded knowledge of the world, a clearer motivation, and so on.

Just to be clear, I would never argue that money is the only thing that matters. But, along with other factors, money should matter, because higher education costs money and someone has to pay.

Add up the costs on one side, and the benefits on the other, and you should choose to study at university if the benefit exceeds the cost. Of course, not everyone tots it up in two columns and a common currency, like an accountant. Consciously or unconsciously, however, that's what is implied when we say that a young person should reflect on whether going to university is worth it or not.

In anyone's personal calculation the cost element is bound to be the private cost. Young people ask what it will cost them, not what it will cost society. But, as things are, the social cost of a degree course is a lot more than the private cost, which is the fee. The social cost is on average four times the fee, and in some courses more than that.

That has important implications. It is sometimes feared that many potential students will deterred by higher fees. That may not be true, given the size of the benefit compared with the cost -- but suppose it is. It would imply that many young people are currently opting in favour of going to university when the benefit is little greater than the private cost. A small increase in the fee would tip them against this choice. That is why they would be deterred.

Yet any small increase in the present fee will still leave the private cost far below the social cost. In other words, the claim that many young people woud be deterred from choosing university by an increase in the fee, when the fee still falls well short of the social cost, suggests that by going to university these same young people will impose a significant net loss on society.

If young people take up university places that cost more to provide than the benefit, there is a loss. Who will suffer the loss? Well, taxpayers. When money is short for nurseries, hospitals, and the care of old people, it's unfair if the average taxpayer, who is poorer than the families of most potential students, and also poorer than most graduates, should have to pay for something that gives less value than the money they have to give up.

To me this worry that many students will be deterred is not a serious concern. For most students, a degree is an excellent deal -- probably worth as much as a small house. Most would not be deterred by having to pay the social cost. The few that would be deterred, however, should be.

There is one qualification to this argument -- a serious one.

  • Myth #2: But what about young people from poorer backgrounds? Isn't it unfair for them?

Potentially, yes; social justice for people who are relatively worse off should be a serious concern. Some young people have the aptitude and motivation to benefit from higher education, but their families are too credit-constrained, or too risk-averse, to support their children through three years of a degree course. I can well understand how a family contemplating the costs of sending a child to university for the first time would worry greatly about whether it would be truly worthwhile. We should definitely be imaginative in working out ways to ensure that candidates from low-income backgrounds are not disadvantaged as a result.

Here's my suggestion.

The government should make available low-interest loans to students from low-income families. The loans should both cover fees and contribute to the living costs of attending university. The repayments ought to be both income contingent and capped to ensure that nothing has to be repaid until the graduate's income reaches a certain level (for example, £15,000), and that repayments cannot exceed some modest proportion of the graduate's income above that level (say, 9%). Finally, after some period (say 25 years), any remaining debt should be cancelled.

The effect of this proposal would be to relax the cash constraint on low-income families and also remove all the risk from debt-based student finance.

Oh. Someone just told me we have that already! How cool is that. In fact, we have it for everyone, not just the ones from low-income families. Hmm. That might be making it too easy for potential students from well-to-do families. I guess that's the price we have to pay for being allowed to help the ones that truly need it.

  • Myth #3: If I have to pay higher fees, I'm entitled to expect more for my money.

It sounds only fair, doesn't it? You pay more, so you should get more back. More contact hours, more personal support and guidance, more feedback.

But there's a problem. Think back to the mid-1990s, to the time before fees, when you would have paid nothing. Does that mean that, at that time, university courses cost nothing? Well, no. They probably cost just as much to provide then as they do now.

The only difference was: then, someone else was paying for what you would have got then. Who? Well, the average taxpayer. Who, by the way, was probably earning less than either the parents of most students, or the students themselves after they graduated. That's why the old system of free higher education was socially unjust; it redistributed income from poorer to richer, across both families and generations.

So, if you -- today's and tomorrow's students -- are not entitled to feel more entitled, what should you feel? Yes, there is a sense in which you should feel more demanding. You should expect more for your money. But you should not expect it from your tutors, who are being paid no more than before. You should expect more from yourselves.

What does that mean? There is a message in higher fees for those who want to go to university for no good reason: to avoid making choices, maybe, or to fill in time, or to party. Don't do it. It's not worth it. The bar is being raised. Think twice, for you may not rise above it.

If you have good reason to go to university -- you want to exercise your brain, study something worthwhile, develop your talents, and broaden and deepen your outlook on the world -- then a degree is still an absurdly valuable investment. In return for a few thousand pounds, you will walk away with a lifelong asset.

I already suggested a degree can be worth as much as a house. Most people see it as completely normal to go into debt to buy a house; they call it "getting on the housing ladder." In fact, a degree is worth more than a house because, even if you fall behind with the payments, no one will repossess it.

  • Myth #4: Forty years ago I got my degree for nothing, so it's only fair that young people should too.

It's true: I got my own university education at the expense of the average taxpayer. It has been a lifelong benefit to me. Through most of my life, I have been paid considerably more than the average to do a job I love. I couldn't have done this without my degree.

Does that make it right? Does precedent mean that past unfairness can never be stopped? The argument sounds like the average taxpayer, having paid once over to make people like me richer than they are, is condemned to go on paying over and over for ever and ever. I don't think that's a good argument.

If you care about social justice, put taxpayers' money into nursery care and primary and secondary schools, which have far more power to re-engineer society than do universities. It is nurseries and schools that truly enable the talented to rise and make good citizens out of all of us and our children. And let those that will reap the benefit pay for their own university education.

  • To go with the four myths, a certainty: raising student fees will not be popular.

According to a recent NUS survey, a majority of those polled was in favour of abolishing student fees; only 12% favoured higher fees.

In some ways that is a strange result. The main beneficiaries of raising student fees will be everyone in the country that pays any sort of tax -- income tax, VAT, excise duties, and the rest: in fact, just about everyone. The main losers will be the future graduate middle class, but their loss will be tiny compared with the gain from graduating with a degree. (There will also be a few that lose because higher fees deny them access to a public resource that they would fail to make good use of. I won't lose sleep over them.)

So, you'd expect the vast majority to favour higher fees. Yet, that's not what we find.

Most likely, two confounding factors are at work. One is organization. There is a well networked lobby of students and middle class parents that like the existing system for siphoning money from poor to rich. In comparison, the average citizen that suffers the loss is poorly organized and poorly networked.

The other confounding factor is the value of gains and losses. Hundreds of thousands of middle class families know they can benefit to the tune of tens of thousands of pounds from no fees or low fees for their children. In contrast, the gain to society from higher fees will be spread more thinly over millions of citizens, none of whom may feel confident of reaping a personal gain -- particularly if they have children that may become students in due course. 

In the words of Raquel Fernandez and Dani Rodrik (in the American Economic Review, 81:5 (1991), pp. 1146-1155), there is "status quo bias." The defenders of minority privilege can have a louder voice than those that prefer moving towards greater justice and transparency for the majority.

In a democracy, however, social justice and transparency will sometimes have their day.

I am a professor in the Department of Economics at the University of Warwick. I am also a research associate of Warwick’s Centre on Competitive Advantage in the Global Economy, and of the Centre for Russian, European, and Eurasian Studies at the University of Birmingham. My research is on Russian and international economic history; I am interested in economic aspects of bureaucracy, dictatorship, defence, and warfare. My most recent book is One Day We Will Live Without Fear: Everyday Lives Under the Soviet Police State (Hoover Institution Press, 2016).

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