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MP65108

MAPS STUDENT FINANCE SEPTEMBER 1998

Overview

Table of Contents

Executive Summary

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EXECUTIVE SUMMARY

· By 2002-2003, the notional annual transfer from public to private funding for higher education could exceed £2.2bn.

· As more people gain degrees, the salary premium declines.

· Women are particularly anxious about the costs of HE.

· More than half the adults surveyed would give a student son or daughter less than £2,000 a year to support them at university.

· Universities have become blasé about the economic value of their courses to students, because of long dependence on state funding.

· The government is orientating universities towards the market, the needs of the economy and employers.

· The chosen mechanisms - the abolition of maintenance grants and introduction of tuition fees - mean that only students from affluent backgrounds can hope to graduate without heavy debts.

The transformation of higher education into a consumer purchase - The aim of this report is to investigate the implications for students and parents of the new need to purchase higher education.

Between 1986-87 and 1996-97, the number of state-funded mandatory awards for higher education rose 93 percent. The government took steps to prevent the costs from ballooning. From September 1998 students themselves, or their parents or spouses, have to find up to £1,000 a year for tuition fees. From September 1999 maintenance grants will end completely, replaced by mean-tested student loans.

Proposals for the UK - The National Committee of Inquiry into Higher Education (the Dearing Committee) proposed a student support agency to replace the funding administration role of the 100-plus local education authorities in England and Wales. Scotland already has a central funding body.

A pilot scheme for individual learning accounts (ILAs) was announced in 1998. A national scheme should be in place by April 2000. Initially, ILAs are focused on helping people to pay for further education courses and vocational training. They have potential as long-term, tax-exempt savings for lifetime education, but experience with TESSAs suggests that only a small percentage of the population would invest voluntarily.

From September 1998 all new students have to pay up to £1,000 a year towards tuition fees, depending on their parents’ income, or their own or spouse’s income if they are classed as mature students. Only half of parents who are supposed to contribute to maintenance grants do so, according to research by the National Union of Students. A similar proportion of non-payers is likely for tuition fees. In Australia, students pay between 25-40 percent of tuition fees. Pre-payment earns a 25 percent discount. Repayments after graduation are collected through the tax system. In the UK there is no provision for tuition fees to be borrowed.

The government is introducing means-tested student loans, to restrict them broadly to those who would qualify for a maintenance grant under the old system.

Expansion of numbers in higher education - In 1997-98 there were 1.59 million students in higher education in the UK, of whom 1.07 million were full time. Between 1994-95 and 1997-98, first-degree enrolments by under-21s rose 11.8 percent, but fell by 15.4 percent for 21-24s and 8.1 percent for over 25s. The reduction of maintenance grants has hit older students, who are less likely than school leavers to be dependent on their parents. Fastest growth has been in biological sciences, librarianship, and information science. The steepest decline has been in education, but enrolments in physical sciences, engineering and technology, and architecture are also down.

Costs and benefits - The average annual cost of a place in higher education was £4,980 in 1996. Higher education institutions had incomes of £11.14bn in 1996-97, of which £4.4bn came from public funds via the funding councils and about £1.1bn via local education authorities (and student award bodies in Scotland and Northern Ireland) for tuition fees.

Only a third of 1996 graduates had permanent jobs in the UK a year later. More than 5 percent of women and 7 percent of men were believed unemployed. In 1996-97 the mean salary for new graduates in the UK was £13,599, and the range was £7,000 to £25,000. Women earn considerably less than men - 16 percent in their first jobs, although women achieve better degrees. Women are more worried than men about their debts.

Skills directly related to employment are often best learned in the workplace. There is a difference between contributing to the national economy and to national life. Women looking after children and not otherwise working are contributing to the second if not to the first. Education has intangible benefits which elude measurement. Higher education will be worth more to the nation in terms of adults able to think logically and creatively, than it will be to the bank accounts of the vast majority of individual graduates.

Dividing the funding cake - Support for individual students in the UK is only a moderate part of the cost of higher education: in 1996-97, £4.4bn was channelled to universities and HE colleges through the funding councils. The universities received £3.04bn in tuition fees, both from public funds for British students with full time places on courses up to first-degree level, and from private sources for other courses. Universities and colleges of higher education had total income of £11.14bn in 1996-97, of which about £5.5bn came from government via the funding councils, and via LEAs in England and Wales and student support organisations in Scotland and Northern Ireland, for tuition fees.

The introduction of tuition fees for students, and the withdrawal of maintenance grants, represent an annual transfer from the public to the private sector of around £1.6bn. Annual public subsidies to higher education have been about £6.7bn (£5.5bn to universities and £1.2bn in maintenance payments). The cuts now being implemented represent a 25 percent reduction from state funding in 1996-97. Student loans have been displacing maintenance grants since 1990-91, and so there has already been a substantial funding shift from the public purse to students themselves.

The government wants to increase participation to 45 percent of school leavers, from the present 33 percent, pushing costs onto the domestic sector means this could be achieved without any net increase in government spending - if students and their families are willing and able to pick up the bigger bills.

New financial problems - Students will take many years to clear debts. If students were asked to meet the whole cost of a course, and also had to find maintenance costs to live away from home, they would need to find well over £30,000.

Students have growing financial problems, but employers benefit from a wider choice of graduates, and their contribution through taxation to the cost of higher education for those graduates is limited by the government’s push to transfer costs to students themselves. Debts for higher education will restrict graduates’ spending, for example on housing, consumer durables and financial services, including their own children’s higher education.

Lessons from the USA - Nellie Mae is the federal organisation for HE funding in the USA, where parents are told up-front that buying a college education is a similar commitment to buying a house, and are encouraged to save for post-school education from the time their children are very small. There is a wide range of funding options including prepayment plans, courses split between local colleges and a university, and a substantial number of scholarships. Both parents and students can apply for student loans.

Possible changes to higher education resulting from the financial squeeze on students - More students will need to study within daily traveling distance of home. This disadvantages students in remote rural areas. More partnerships between FE and HE are likely. Universities could teach students for more of the year than at present, reducing the time taken to gain a degree. Oxford and Cambridge terms total only 25 weeks a year, for example. More cooperation between HE and employers would be beneficial, to give students paid work placements and the opportunity of bursaries. Prospects for the least successful universities are poor.

More ABs, but little joy for women - Inflation in degree holders is changing the traditional structure of the social grade profile. In 1995, 21 percent of the adult population was in grades A and B, compared with just over 17 percent in 1986. Men with qualifications earn more than women. In 1996, women graduates working full time had a median income of £353 a week, compared with £485 for men. The increasing percentage of women with a degree, 14 percent in age band 20-29 compared with 5 percent aged 50-59, reduces the scarcity value of the qualification and thus the potential salary premium.

Feel-good factor, but few savings - A feel-good factor has arisen, because disposable incomes increased 24 percent between 1993 and 1997, while the RPI rose by less than 14 percent. Yet few individuals have accessible financial resources apart from standard bank and building society accounts. Fewer than 1 in 12 has a tax-exempt special savings account, and only 1 in 17 has savings in a unit trust. The wealthiest 5 percent of the population own 36 percent of national marketable wealth. One household in three has no savings at all, and more than half have either nothing or between £1 and £1,500. These households will have difficulty supporting student children. Income inequalities have become much more marked. In 1979 the top 10 percent of households had incomes less than five times larger than the bottom 10 percent, but by 1996 they had 14 times as much.

Parents are anxious and confused - In recent years, parents (or mature students themselves, or their spouses) have been asked to bear about one-third of the cost of maintenance awards for students. They have not had to pay anything towards tuition fees for students with mandatory awards.

Parents are now anxious and confused as a result of the growing demands on them to support their adult children. Almost 6 in 10 adults agreed strongly that it will be very difficult for parents to support their children at university whilst also having to save for their own retirement, and another 2.5 in 10 agreed slightly. Women worried more than men. More than half agreed strongly with the statement ‘I would be willing to take out a savings plan or loan to help my son or daughter attend university’, and another quarter agreed slightly. But well over half would be willing to give a student son or daughter less than £2,000 a year, and only 1 in 10 would seek to provide more than £4,000 a year. Women would give less than men.

Nearly 6 in 10 agreed strongly that students should study the same subject they wish to pursue a career in. In addition, almost 2 in 10 agreed slightly.

One in 3 agreed strongly that a university degree does not mean as much as it did 20 years ago. More than 1 in 4 agreed slightly. Older age groups were most in agreement.

Women are nervous of debt to fund a degree. Almost 4 in 10 disagreed strongly that it is worth paying for a degree course at university even if it means getting into debt, and almost another 2 in 10 disagreed slightly. Only just over 4 in 10 men disagreed at all. More than three-quarters of those interviewed agreed that many students from low-income families will no longer be able to support themselves. Almost one-third agreed that more students should study part time so that they can work to support themselves. More than 7 in 10 agreed that the introduction of tuition fees would prevent many students from being able to afford to study for a degree. Six in 10 thought it would be hard to repay a student loan.

Problems with loans - About half of graduates with student loans have applied to defer repayments on grounds of insufficient income. In 1996-97, £86m worth of loans was paid. The value of loans outstanding at the end of August 1997 was £2.785bn. £1bn of the debt was sold to the private sector in March 1998, and the sale of a second £1bn was announced in June 1998.

Banks begin to encourage customers to save for education Banks have not yet begun to target parents heavily with savings plans emphasising the benefits of preparing well in advance for children’s post-school education, but there are signs that this is beginning to happen. Parents would need to save at least £75 a month for 10 years, in an environment of minimal inflation, to hope to yield enough to support a student through a three-year HE course.

NatWest is the first of the major banks to offer more than top-up loans to students. Its new Professional Trainee Loan Scheme makes up to £15,000 available from the second year onwards to students working to qualify in a number of specific professions. The current interest rate is 7.5 percent, fixed. A NatWest subsidiary has purchased the first £1bn of student loan debt to be privatised.

Demographic pressures - The generation now aged between 7 and 21 will have difficulty repaying the costs of their own HE, helping to fund that of their children, and paying sufficient pension contributions.

From 2002 the higher education debts of each annual cohort of graduates are likely to exceed a notional £2.8bn at 1998 prices, if students have average debts of £11,000.

Each cohort of students and their parents who do not qualify for whole or part student loans, or to have their tuition fees paid, will be trying to find around £325m a year for living expenses and tuition fees.

Savings can benefit the economy - Saving for HE through bonds, unit trusts and other savings and investment plans should help the economy. Low inflation helps students because the cost of the goods and services they need to buy remains relatively stable. Pressures on families to save are opposed by incentives to spend and to avoid the savings means test for social security benefits.

Back to the kitchen sink - Women stand to lose most from the changes to HE funding. Low-income families and mature students who are short of money will also be badly affected by the abolition of maintenance grants. In a market-orientated HE sector, it is not equitable to charge students the same tuition fee regardless of the quality of the course or the reputation of the degree.

Text © 1998 MAPS

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