Why are English uni students going to be charged so much?

To great controversy, England is lifting the cap on university fees to £6,000, with charges up to £9,000 if access measures are put in place. To the government’s unpleasant political surprise, most are going to the full £9,000 from 2012. This is similar to the experience in Australia in 2005, when universities were permitted to charge up to 25% more than the previous HECS rates (except in education and nursing). Pretty soon all were charging the maximum fee.

While not all these fees are rip-off prices, given the cuts to tuition subsidies, I don’t think this is a very good outcome. Even on zero subsidy, in some courses £9,000 in income would translate into significantly more than cost, if Australian costs are any guide. So what’s going wrong?

Without being expert on English higher education, the mistake appears to me to be partially deregulating prices while regulating supply. In the UK as here in 2005, when the government restricts supply to well below demand it’s a licence to increase prices. If people want a degree, they will have to take what is offered even if it is over-priced (though we are yet to see if in practice demand will dip in the UK). Uncapping supply and letting new entrants into the system would create more pressure to keep fees down.

Though I am not sure of this, I wonder whether the capping process itself might be having perverse consequences. Price fixing is a kind of price signalling. Most unis probably decided that they could guess what their competitors would charge and matched it. Everyone goes for this one price point. In a fully deregulated market without this price norm we surely would have seen a wider range of fees (as we do in fact see in deregulated markets).

One other quirk of the British system is that unis that charge £9,000 rather than £6,000 have to provide assistance to low-income students. What it means is that other students have to borrow money to subsidise their classmates. Though given the poor market design of the British higher education system there is no guarantee the money otherwise would have been spent on those actually paying the fees, scholarships and bursaries are unfair, increase costs, and fail to achieve their objectives.

The UK government has paid a political price for its higher education reforms. It is a pity that given the decision to spend so much political capital (especially for the Liberal Democrats) it didn’t go for a better policy.

11 thoughts on “Why are English uni students going to be charged so much?

  1. “Even on zero subsidy, in some courses £9,000 in income would translate into significantly more than cost, if Australian costs are any guide.”…”In a fully deregulated market without this price norm we surely would have seen a wider range of fees”
    .
    Not compared to US prices — my opinion is that universities will charge whatever they can get up to a point (curiously, many postgraduate courses are underpriced in terms of what you could get, but these are already well above 9K), and obviously most expect to be able to get enough students at 9K. In my books, most of the difference in a fully deregulated system would be above that — Oxford and Cambridge could easily charge 20K (many of the good US unis charge around that) and get as many students as they wanted.

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  2. Good on em I say – I can’t see what’s wrong wiv it. 9 grand is nothing. Not even half the cost of annual school fees. Besides, perhaps enough to keep all the riff raff and commoners out of the unis. Good to see.
    Plus, if they make a little more than cost, who cares. The uni’s can re-invest into their organisations. Rather see more money going to unis than other things.
    Anyway, went to the dawn service the other day…didn’t see much diversity in the….[wait fot it]…the military ranks. I give the Americans that much, their forces are generally reflective of the community. Going to Adfa, Point Cook, Lavo etc, reminds me of Aussie life back in the 70’s. Says a few things me thinks !

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  3. Conrad – The US for-profits can do it for less, as can a number of full-fee institutions here.

    While Baz is right that the prices are not unaffordable, the unis are capturing more of the profits of human capital than they would in a different system.

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  4. “The US for-profits can do it for less, as can a number of full-fee institutions here”
    .
    I think you need to compare like with like, especially subject areas and requirements — many areas in Australia (and the UK) have governing bodies that wouldn’t allow anything like that which some of the US colleges get away with. For example, in my area, we are obliged to have certain numbers of staff with certain qualifications (many of whom would get paid a lot in private industry for having them), and are also even obliged to have a certain number of full professors. It’s also not clear to me whether any Australian university is as bad as many of the 2 and 4 year colleges in the US (that’s not saying all are bad — some are quite fine, but the fees vary massively too), and many of the private providers here are basically awful also (excluding those set up for particular areas that universities don’t cater for well, e.g., Microsoft certification and so on — these are fine as far as I’m aware). We get these students occasionally trying to get in based on having done “first year” at some of these places. Two things are ubiquitous about them: they always have been given super marks and they always appear to have learnt next to nothing (obviously there are selection issues, since if you did well in high school there would be little reason to go to these places — but then, I don’t see why these places arn’t teaching them things they can’t do well, like write). This problem is so bad we don’t let them in anymore, and that’s not because we don’t have pressure to get as many students as possible. Given my experience with this, I don’t see any real value in setting up private providers at this end of teaching spectrum.

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  5. While I doubt any institution can completely overcome the effects of low IQ or bad schooling, we are talking about basic input costs here, and because most of the privates don’t do any research they have instantly wiped out a huge cost driver in the public universities. This is why they can offer their students much more personal attention than the would get at a public uni.

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  6. “and because most of the privates don’t do any research they have instantly wiped out a huge cost driver in the public universities”
    .
    I don’t think it’s that simple. Private institutes generally need to make a profit which public universities don’t. It’s also the case that research works to some extent as a wage subsidy, because it basically allows universities to get highly qualified people that are qualitatively different to those out to make more money. Where are you going to get a cheap engineer or anyone with a clinical qualification that is willing to teach all day and do nothing else, for example? It’s already hard for universities to get staff in many areas, and I don’t see why it is going to be easier to find cheaper ones that need to do a more mundane job.
    .
    It also seems to me that a likely problem of having all these low quality providers is that it will just end up as the “training” sector for OS students did, except that it will be locals that pay the cost instead — note that I believe this not on philosophical grounds, but on the current empirical sitations. Already these low cost providers advertize timeselves as university entry course (which they arn’t) and I assume work on something like the US model, where one person teaches 6-8 courses a semester, and hence no-one learns anything since they simply don’t have time to do proper assessment, help, etc. .

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  7. Conrad – I think the research element expands the labour market to include people whose first love is research, but at the price of excluding a large number of people who are perfectly capable of teaching a standard curriculum even though they will never advance knowledge very far.

    To do their teaching, the public institutions have relied on a huge pool of casualised or short-term contract teachers – so for some of these a full-time permanent job would presumably be more attractive than being endlessly strung along in the hope that they might get a research job one day.

    Most unis have profitable teaching operations – U of M certainly does. The only difference in this regard between for-profit and not-for-profit is what they do with the money.

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  8. Some good points above, but missing the folly at the heart of HE tuition fees, which is that only stupid governments deter at the margin many who would benefit from HE from entering HE, which raises their lifetime earnings (but only once HECS debt is cleared), and thereby the government’s proceeds from all forms of taxation on those INCREMENTAL earnings vis a vis those of Year 12 leavers (and I can show from UK data that even the lowest quartile of graduates earns more than LQ of Y12 leavers). More on all this is at my website.

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  9. Tim – I have read your work in the past, but surely you should compare the lowest quartile of graduates with the highest quartile of year 12, to try to capture the group that might conceivably have the ability to complete a uni education?

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  10. Andrew, apologies for delayed reply.

    Interesting point.
    I chose to compare UQ graduates with UQ Y12 as a way of controlling for ability and/work ethic. Doing as you suggest, the UK data show that indeed UQ Y12 earn more through life than LQ graduates, and thereby yield more in tax than the LQ graduates. However the LQ graduates still yielded a real rate of return to government from the extra taxes it accrued of over 5% p.a., well above its own real cost of funds and the Treasury minimum ROR for public sector projects of 2.5%, and investment theory tells us the optimal HE investment level is that which yields at the margin a rate of return equal to the real cost of funds.

    However, it is reasonable to suppose that the UQ Y12 leaver (assuming with HE entry level grades) would do much much better than the LQ graduate if he/she had not been deterred by such issues as HECS debt. The NPV of tax to the government from the median graduate’s earnings was £15,000 in 1990, against £8,233 from the LQ graduate.

    The private real RoR to LQ, Median, and UQ graduates were all in the range 12-13% p.a., because of steeply progressive taxation in the UK, then as now, but the actual cost of bank loans in 1990 UK was 20%, so that unless one had prescient knowledge that incomes would rise rapidly and that interest rates would fall, one would have hesitated to borrow then to pay the level of fees now expected of undergraduates.

    Best

    Tim

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