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.

- 17 comments by 2 or more people Not publicly viewable

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  1. Steve

    Your article does not consider the fact that it is not only the individual who benefits from doing the degree. The increased salary which you say a graduate can expect means that the state will in all likelihood earn increased tax revenues from degree holders in future – 25% of that extra £150,000 earnings is £37,500 which is already a hefty contribution back, and that’s without considering additional national insurance, or those who make it to the top tax bracket. It is true that a minority of graduates will go and work abroad, but overwhelmingly they will more than pay their fees back through additional taxation.

    In addition, the government has been trying to increase university attendance, so that “UK PLC” can remain competitive with other countries. Surely it is better to invest in the minds and skills of intelligent young people than it is to prop up failing industries, and subsidize unskilled people who no-one wishes to employ?

    Its also worth noting that universities, including Warwick can and do generate large amounts of revenue from other activities which are associated with teaching undergraduates. By your logic, as the university benefits from the undergraduates, they should also contribute to some of the costs.

    23 Nov 2009, 11:28

  2. Mark Harrison

    Thank you for your comment. I disagree on some points and agree on others.

    It is wrong to think of the higher tax rates on higher incomes as repayment of the costs arising from past benefits. By paying higher taxes, high earners show the solidarity with today’s poor that the community expects; progressive taxation is not a reimbursement for past benefits. If so, it would be hard to explain why higher taxes are paid by all high earners, not only those that have had the benefit of a British university education.

    I agree the government should not invest in failing industries. It should also think twice before investing in industries that can support themselves—like higher education. Government funding should be largely limited to the measures that support participation by students from low-income backgrounds and funding support for research.

    I also agree with your final point. The university does benefit from commercial income associated with students’ spending. But much of that revenue does get ploughed back into the university’s own spending on teaching provision.

    23 Nov 2009, 12:52

  3. Gavin

    I have two comments on your article.

    First, I don’t follow your argument that the extra taxation paid by graduates should be ignored. If you want to consider both the private and social costs of degree courses, it does seem rather unreasonable to claim that only the private benefits are relevant. Clearly, the social benefits are also important. If I’m the government and I know that for every student I fund to go through university (costing approx £30k), I will get £50k back in extra taxation income, then (even ignoring the other significant benefits that arise from a well-educated population) surely I should be investing in every student who is capable of fulfilling their side of this excellent deal for the taxpayer?

    Second, I am very uncomfortable that you cite the income of students’ parents. Why is this relevant for people who have left home and are over 18? Do you think that a 20 year-old unemployed non-student should receive reduced unemployment benefit if they have wealthy parents? And if you do, at what age should someone’s benefits from the state be means-tested against their ability to pay and not their parents’ ability to pay?

    24 Nov 2009, 00:50

  4. Mark Harrison

    It is an interesting way to think about it. Essentially you are saying that the tax revenues generated by high earners are social benefits of their activities in excess of the private benefits. I think this is wrong, however: the high earners reap a private benefit (their gross incomes), part of which the government appropriates for purposes of social solidarity or cohesion.

    The implications of seeing government revenue as itself a social benefit to be maximized (e.g. by putting lots of people through university and then taxing away the gains) would be profound and severe. The government would tax many more things than it does now, and more heavily, and would raise much more money, and it would promote many activities specifically because they are taxable. But society as a whole would be poorer, because heavier taxation would proceed to the point of severely damaging productivity, incentives, and private welfare.

    You are not alone, by the way. Your perspective has a long and honourable tradition in economic thought. It can be traced back to the mercantilism of the seventeenth and eighteenth centuries. Mercantilists wanted to measure the economic dimension of national welfare by the amount of gold in the treasury. That implied taxation, and included promoting activities (such as trade, road, and canals) to the extent that they were taxable.

    In modern economics, in contrast, we aim to measure the economic aspect of welfare primarily by personal living standards and well being; equity can be taken into account, and “sustainable” goes without saying. But mercantilism is still alive and well in the world today, e.g. in Russia and China. Those two examples show that mercantilism does not have the same results everywhere, but neither is a model I would want our own country to follow.

    Your point about parental income is perfectly reasonable. All that I would say is that it is a standard problem in means testing. (It can also apply to the income of partners and even children.) Not applying a means test to grant benefits is often simpler and gives rise to fewer anomalies. However, it is often much less efficient, in that the majority of people receiving universal benefits generally do not need them. Take me: having reached the age of 60, I am entitled to a winter fuel allowance, which is ridiculous.

    If we are concerned about the transmission of social privilege through the generations, and if we prefer tomorrow’s middle class to be constituted on the basis of merit and effort rather than inheritance, we should not ignore parental circumstances. We should also not forget the strong, naturally selected tendency of parents to help their children.

    Parents should help their children (just as in later life children should help their parents), and should be allowed to do so; all I am saying is that this does have implications for the transmission of privilege, and society should also do something to help children that do not have a silver spoon to fall back on.

    24 Nov 2009, 10:05

  5. Matthew

    I find your argument a bit unsettling. It is fairly obvious to me that students themselves benefit significantly from higher education, but that society does also (and not only through a higher tax take). After all, the general benefits to society which accrue from HE was the explicit rationale behind Labour’s 50% participation target.

    Having a service where both the individual user and society as a whole benefits is not at all unusual: the NHS would fall into the same category. Does your argument for income contingent loans for HE also apply to, say, cancer treatment? Having some kind of repayment system for cancer treatment would still represent an excellent deal for the patient if it were set at a level not to dissuade those with lower incomes.

    I worry that the logic of your position is that most public services would become paid-for on social-redistribution grounds. For example, why do we have an Embassy in India which offers free help to British travellers abroad? The vast majority of lower income families will never personally benefit from this service: so is it socially regressive to offer tourists free consulate assistance?

    24 Nov 2009, 13:01

  6. Mark Harrison

    As a community I suspect we see health care as a right, at least up to some fairly high minimum, in fact, rather like education. Perhaps we see a degree of protection while travelling abroad as something of a public good (but the financial assistance available from British embassies is often repayable). So I take these points without altering my views on student finance.

    The question of whether there is a significant social benefit from higher education on top of the private benefit is more interesting, but I do not know of any evidence that addresses it squarely. It is very easy to claim it, but hard to prove it.

    If one took the view that historically, over time and over countries, a strong middle class has generally been good for the economic and political system, and if one saw higher education as an industry that helps to produce tomorrow’s middle class, then a case for a general subsidy of higher education would be a possible implication. I haven’t seen that case made by those that oppose top-up fees.

    24 Nov 2009, 16:28

  7. Matthew

    The government cites this working paper by Sianesi & Van Reenen as evidence of the wider (economic) benefits of higher education:

    I am certainly not an expert on macro-economics, or indeed any type of economics. But clearly you are, so it would be interesting to hear whether you are persuaded by their arguments.

    I am, however, vaguely aware of the enormous literature on the psychological effects which result from higher education. I suspect many of these could reasonably be classified as social benefits.

    From memory, supplemented by a quick google, here’s a ragbag collection of findings: Students who attend university tend to become more open-minded, more socially tolerant, less authoritarian, less dogmatic, more racially tolerant, and more supportive of human rights. (This is after you factor out the influence of normal maturation which you’d expect to occur anyway). Ernest Pascarella is the person to search for if you fancy investigating further, or anyone who cites Feldman & Newcomb’s “Impact of College on Students”.

    25 Nov 2009, 07:57

  8. Mark Harrison

    The review paper that you cite, Sianesi and van Reenan (2000), demonstrates the link from education to growth. It does not demonstrate that social returns are higher than private returns in the market for higher education. Indeed, it is mainly about primary and secondary schooling. It comments (p. 7) on the difficulty of comparing social and private net benefits when government provision holds the private cost below the social cost. It cites an OECD study of “social rates of return to different levels of education, calculated for various OECD countries. ‘Social’ rates are consistenly found to be lower than private ones,” the apparent reason being the subsidy of the direct cost of schooling.

    I do not dispute that social benefits from higher education exist. It is a problem to understand the extent to which they are not captured by the recipient. I also appreciate your appeal to middle class values. Here the issue is whether the middle class should be a closed club from one generation to the next.

    25 Nov 2009, 09:23

  9. Matthew

    Two brief comments:

    (i) One thing that has always puzzled me about arguments like the one you are making relates to where research fits into your worldview. I assume that at some point in your career you have been in some kind of senior admin role, perhaps HoD or on some faculty committee? If you have been, you will be aware of the general principle that for an academic department teaching makes a profit and research makes a loss. This is why, of course, there are so few non-teaching research institutes (especially in the arts and social sciences).

    When the tax-payer funds a significant proportion of the cost of teaching, this arrangement seems quite equitable: the fee-subsidy which the government provides can be seen as just another way that they support research. But if the student were to be expected to provide all of this money themselves this arrangement suddenly becomes entirely unreasonable. Why should I expect my undergraduates to personally pay for my research time? I suspect what would happen is that some universities would decide to break the link between research and teaching, would dramatically cut research time, organise themselves more like schools, and charge considerably lower fees to attract more students. In short, the university sector would radically alter.

    Suppose I’m right about this, would you see it as a problem?

    (ii) It is a bit cheeky to claim that people who believe that higher education should be funded out of general taxation wish to make the middle class a closed club. You cannot possibly make this suggestion until you know how such a person would advocate organising the tax system.

    25 Nov 2009, 10:25

  10. Mark Harrison

    Free higher education has the overall effect of redistributing income from poor to rich, across families and across time. This is because today’s average taxpaying household is poorer than the average household that sends students to university today, and is also poorer than the average graduate tomorrow. Of course you could propose some offsetting distortion somewhere else in the tax system to compensate for this, but the net effect of two distortions (compared with none) would be an increase in the burden of deadweight efficiency losses. This would be bad public finance.

    You also raise questions of how university research should be financed, how fee income should be used, and the extent to which research and teaching are substitutes or complements. These are very interesting and important questions, but they are off the point of who should pay for university teaching.

    26 Nov 2009, 11:18

  11. There is no way I would have gone to university if the current system wasn’t as it is, it was looking doubtful as it was as there is a large gap between actual living costs and what the Government gives that parents are expected to meet and my parents didn’t want to. I do Maths, this year I will graduate, train as a teacher, then teach Maths in a secondary school for, I assume, the rest of my working life. Not an option without the degree, in which case I’d probably have been a Care Worker or worked in a shop. The risk that the job I’d assumed I’d get not being an option anymore (eg Investment Banking has reduced recruitment at the moment) is too high to take out any sort of loan and I wouldn’t have taken it.

    You go on about the social cost and benefit of degrees as though they are all equal. How about splitting funding by usefulness of degree? To some extent this is already done, Nursing gets something like that, and I know I’ll get a lot of free money for my Maths PGCE. I resent the idea that someone from a low income family can be given a larger loan than me plus a grant for getting DD at A level and a place on a Football Studies degree at some university I’d never heard of (this is a real example from some UCAS booklet sent to me years ago, it annoyed me so much I never forgot it).

    27 Nov 2009, 09:32

  12. Alfie

    Could the issues of debt and social inequity both be resolved by simply abolishing fees and introducing a surcharge to graduates’ income taxes or NI (an extra 3% percent say, someone could do the necessary maths)? This would probably raise more tax revenue overall, avoid putting off poorer students and reduce the social problems caused by having thousands of graduates starting their working lives in debt. It would also discourage those students who do no work as the surcharge could apply whether you passed or not. As a recent graduate I would much rather be in the position of having the economic freedom to relocate, take out a motgage etc whilst paying back more to society for the education it has provided than feeling the weight of twenty thousand pounds on my shoulders.

    12 Dec 2009, 18:57

  13. Mark Harrison

    What “social problems caused by having thousands of graduates starting their working lives in debt”? Our student loans are a debt unlike any other: you do not have to pay a penny until it is completely affordable. They are incapable of giving rise to social problems. What “weight of twenty thousand pounds” on your shoulders? Working families will cheerfully shoulder debts of several times that magnitude to buy a house. A degree is of comparable value—and, as I already mentioned, if you default on the payments, no one will take it away. Finally, if you incur an obligation to society, why should you not feel it? We are in a mess in the economy partly because people took on debt too lightly, not being persuaded that if you consume more than your income in one period you must spend less than your income in the next. Thank you for your comment; sorry if this sounds impatient. (But well, really!)

    12 Dec 2009, 21:55

  14. Alfie

    Don’t worry about sounding rude, i’ve been accused of being vacuous, an Orientalist, anti-religious, simpering, stupid and more on Warwick blogs. The social problems, if any, are rather hard to assess at present, as my year’s graduates are the first to have this increased debt. I’m not sure if its fair to write off student debt as being similar to buying a house because student debt will go along side a mortgage. It isn’t one or the other, graduates still have to live somewhere. I’m not aware whether student debt is going to affect how much we can borrow for mortgages etc. I’m not sure I understand your last argument, you say people should feel their obligation and yet blame our economic woes on debt, so why is it good for students to be encouraged to acquire it along with everyone else?

    14 Dec 2009, 18:09

  15. Mark Harrison

    My point is that students should be encouraged to understand the costs and benefits of their own higher education and make informed choices based on that understanding. Even if they had to pay the full cost of their degrees, most would still find this a worthwhile choice. A few would not, and these should be deterred from doing so. Whichever category we are discussing, we should not ask the taxpayer to foot the bill, because this would make our society less equal and our economy less efficient at the same time.

    It is reasonable to think that we might tolerate some reduction in efficiency to achieve greater equity, because most people do not like living in a highly inequitable society. But that is not the problem here. Introducing student fees is a relatively rare example of a change that improves overall efficiency and equity at the same time; when we find such opportunities, we should grab them with both hands.

    15 Dec 2009, 11:16

  16. Tony Mann

    Student loans can have quite a dramatic effect on your ability to get a mortgage even if you have a good job after you graduate. The monthly amount you pay towards the student loan reduces the income that lenders will take into account when they calculate how much they are willing to lend you.

    Also as there are now so many people who are going to university, is it still the case that you will earn more over your lifetime if you have a degree. I believe the statistics that show that you would earn more were calculated based on the situation before the large increase in university attendance.

    02 Mar 2010, 15:25

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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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