Top-up fees verdict? 'The only way forward'

A report commissioned by the Russell Group says top-up fees will widen access to HE and allow British universities to compete globally. Tony Tysome reports

Top-up fees are the only way forward if British higher education is to remain internationally competitive and widen access to students from working-class families, economists commissioned by the Russell Group to consider future funding options have concluded.

Far from sitting on the fence and presenting a range of viable options as predicted, their report, Funding Universities to Meet National and International Challenges, says that allowing universities to charge differential fees is the only way to reduce social exclusion from higher education while boosting universities' ailing budgets and saving the taxpayer a fortune.

It says differential fees "place more responsibility on the (high-income) beneficiaries of higher education relative to the (lower-income) taxpayer; they allow universities greater freedom to set fees in line with underlying cost differences and be more responsive to changes in market conditions; and have the potential to bring significant additional resources to the benefit of all universities. They also make universities more sensitive to the will of empowered consumers. Finally, they have the potential to do something serious about access," the report argues.

Other options, including enhanced funding council allocations, the introduction of a graduate tax, and funding via vouchers, have been ruled out.

The first could cost taxpayers billions. Just to maintain expenditure per student at current levels and achieve government targets of 50 per cent participation among 18-30 year olds by 2009 would cost an extra Pounds 2 billion a year, the report says.

"Even if there were a remote chance that it could happen, arguably it should not happen because it redistributes from low-income to high-income taxpayers and is actually a regressive mechanism for funding higher education and it has failed in terms of social inclusion," it adds.

A graduate tax could raise up to Pounds 3.7 billion a year, but graduates would have to pay throughout their working life and could end up paying back more than the cost of their degree. Vouchers offer a flexible alternative funding system, but alone would not bring in more money, and would therefore fail to widen access.

On the other hand, top-up fees supported by scholarships and a system of income-contingent loans "has the potential to provide an injection of resources quickly and over a long period".

The paper advances six arguments for top-up fees:

* If universities are to expand as the government wishes without further deterioration in class sizes, infrastructure and funding, further resources are required from students who have more to gain through future earnings than lower-income taxpayers. Public expenditure per student has decreased by nearly 50 per cent in real terms since 1980, and student-staff ratios have doubled

* If universities are to compete in the global market in recruiting international students and sustaining world-class research, they need more money, which again should not come from the taxpayer. Spending on universities in 1995 amounted to 0.7 per cent of GDP - less than half the average of all Organisation for Economic Cooperation and Development member countries, and a third of that invested in the US

* Universities have different cost structures, depending on their subject mix, balance of activities, and mission. They should be allowed to vary fees accordingly

* Present funding arrangements mean that the contribution students make is unrelated to the costs of teaching, and to the expected rate of return of a degree. Analysis has suggested that over a working life, the value of a degree could be as much as Pounds 400,000. The rate of return on investment in a degree is estimated to be about 11 per cent - almost twice what the Treasury requires for public investment

* Fee differentiation would permit universities to levy higher fees on those able to pay, so as to generate resources to support poorer students with scholarships

* Top-up fees would mean "greater market discipline and less need for costly regulation".

The report goes on: "Differential fees have the capacity to unlock additional resource for higher education to improve quality and access, to allow student contributions to be more closely geared to costs of provision and to allow universities to manage their activities more effectively and efficiently."

Even "modest" fee increases would result in significant funding increases for all universities, not just Russell Group institutions.

The report presents possible models to illustrate the point. If fees were based on the four Higher Education Funding Council for England's price groups, for instance, arts and humanities students might continue to pay fees at the present level, while medical students in the top band would pay Pounds 4,500 a year.

Such a scheme would bring an additional Pounds 7.8 million per year for large old civic universities, Pounds 3.1 million per year for medium-sized provincial universities and Pounds 8.4 million a year for provincial new universities. The sector as a whole would benefit by Pounds 600 million a year.

Raising the fee cap to Pounds 2,000 would bring in an additional Pounds 9.4 million for old civics, Pounds 5.1 million for medium provincials, Pounds 18.4 million for new provincials and Pounds 1.02 billion overall. With a Pounds 4,000 cap, the potential gains would be Pounds 28 million for the old university, Pounds 15.4 million for the medium and Pounds 55.1 million for the new, with an overall gain of Pounds 3.07 billion recurrent.

The report acknowledges that the introduction of top-up fees could adversely affect demand for higher education, particularly for students from low-income families. However, it argues that the present system is failing to attract such students. The answer, it says, is scholarships and bursaries, and a well-designed privatised income-contingent loan scheme that can cover the up-front costs of both fees and maintenance.

The report points out that many of America's Ivy League universities provide scholarships for up to 50 per cent of their students. While these institutions have vast endowments to draw on, differential fees would help institutions provide more scholarships, and the government could target financial support at students on scholarships.

The rest of the student support needed to widen participation should be provided in the form of an income-contingent loan scheme. This could save the taxpayer billions of pounds by selling all debt to the private sector and privatising the Student Loans Company. Students would not have to pay a penny up front. They would start paying off debt through the National Insurance collection system at a lower income threshold than at present, but would be able to spread repayments over a longer period.

As well as helping students to cover the cost of their higher education, the system could release an extra Pounds 2 billion a year for universities and public spending.

The report argues: "Removing financial pressures from students and their families in this way removes a major impediment to university entry to children from disadvantaged backgrounds."