Costs of new fees system outweigh the benefits, economists warn

The short-term benefits to the government of increasing student fees in England will be outweighed 6.5 times over by the long-term costs of the new system, according to a new report.

February 19, 2013

The analysis in the report, titled ‘Are the changes to higher education funding in England cost-effective?’, was conducted for the Million+ group of newer universities by London Economics, the same consultancy used by the Department for Business Innovation and Skills to model the potential costs of the new student funding system in the higher education White Paper of 2011.

The report acknowledges that the shift from direct funding of teaching via the Higher Education Council for England to higher student loans is expected to reduce Treasury expenditure by £1.166 billion this year.

However, the analysis suggests that direct costs associated with the new regime, including increased write-off of student loans, could outweigh these savings.

“In total, £2.798 billion worth of tuition fee loans and £1.298 billion of maintenance loans provided to the smaller 2012-13 cohort of students are expected to be written off over a 30-year period, compared to £808 million and £870 million in write-offs for the larger 201-/11 cohort of students,” the report finds.

In addition, higher tuition fees will be accompanied by reduced earnings and taxation revenues because of the smaller number of graduates entering the jobs market and postgraduate education, the analysis says.

It goes on to claim that one area not widely debated when the changes were developed was the impact that higher tuition fees would have on inflation.

Based on data from the Office of National Statistics, the report estimates that the increase in tuition fees will have a 0.24 percentage point impact on the headline inflation rate, as measured by the Consumer Price Index. Because some government outgoings, such as public sector and state pensions, are linked to the CPI, this increase will result in higher costs to the government.

Even when tax revenue from products linked to CPI, such as cigarettes and alcohol, is taken into account, this potential increase in inflation will result in around £185 million of additional Treasury expenditure in 2012-13, the report says.

The report also cites research by the Office of Budget Responsibility, suggesting that inflation as measured by the Retail Price Index will increase by about 0.22 percentage points in each of the first three years of the new tuition fee scheme. Because RPI impacts on the interest payments paid by the government on index-linked gilts, this increase will cost £655 million in additional payments in the first year of higher tuition fees alone.

Gavan Conlon of London Economics, said: “It is essential for the government to identify good value for money for the UK taxpayer. To do this it must compare the total costs and benefits of changes to the higher education funding system, and at the moment the costs appear to substantially outweigh the benefits.”

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