Comment: Universities must fear each other
The government should play universities off against each other, by refusing to give places to institutions that offer poor value for money.
By Dr Tim Leunig
The government’s reforms to higher education funding are not working as anticipated. There are good practical, social and economic reasons to support higher student fees. At a practical level, fee-paying students are more likely to demand high standards, shaking up universities which often seem to see students as a necessary nuisance. At a social level, transferring the bill to graduates is progressive, since graduates are richer than average taxpayers. At an economic level paying for college means that students will pick courses with good prospects. For all of these reasons CentreForum, a liberal think tank, has long supported higher student fees.
The new system is very progressive. No-one has to pay back until they earn £21,000, a figure that will rise over time with earnings. Graduates who don’t get “graduate jobs” won’t have to pay back more than a token sum.
And yet the new system is not working at all well. The government expected that top universities would charge £9,000, and be better off as a result, but that all other universities would charge much less – £6,000, give or take. The government argued that this did not require the university to make any particular savings. University faculties have had two derisory pay awards recently, reducing the financial pressures on universities.
According to the Times Higher Educational Supplement, only London Met will have an average fee of less than £7,500. All of the remaining universities are charging more, and the majority of courses at the majority of universities will have fees of £9,000.
This is bad news for students, who end up with higher debts. It is also bad news for taxpayers, because graduates who don’t pay their loans back have them written off – at taxpayers’ expense. There are likely to be a lot of graduates who cannot pay off £27,000 of fees, plus over £10,000 in maintenance loans. At these fee levels, it is not even clear that the new system will be any cheaper than the one it replaces.
We could just accept that it costs £9,000 to provide a university education. Proponents will note that fees are higher still in the US, even at places that are not particularly prestigious. But there are lots of reasons to think that university could be much cheaper. After all, until recently, universities’ fee income from students and government combined were around £7,000. Australian universities typically charge no more than this amount. And even our top private schools charge much less per hour of tuition than this.
Universities are charging so much for many reasons. Universities are a “positional good” – that is, students see the price as a signal of quality. Unlike almost any other product, consumers want high prices – and unregulated suppliers are happy to oblige. This is reinforced by the media narrative, which concentrates on the £9,000 figure as the bill was going through parliament. It became the fee everyone was expecting, and that in turn made it easier for universities to charge £9,000. Universities that raised fees immediately could also blame the government – pointing to all sorts of cuts, and claiming that they were forced to do this, however much they hated it.
Competition was expected to keep fees down. This has not happened for two reasons. As we have noted, students are surprisingly ambivalent about fees. In particular, they want to avoid their institution being seen as a “Ryanair” or “Ratners” university. Second, the government gives all universities a quota of places. This was their big mistake, because it means that universities are not really competing with each other – they are almost guaranteed to fill their slots, whatever they charge.
The government should, instead, have played universities off against each other, by refusing to give places to institutions that offered poor value for money. Instead, those places should have been given to universities who could show that there was demand for their courses, and that they were good value. I have argued that in the long term this should be done through a formal auction mechanism, but an informal approach would have made sense in the short run. The only thing that matters is whether universities believe that they will lose lots of places if they charge too high a price, so that they prefer to charge a lower price to be assured of getting places.
This is essentially how Ford, Tesco and Marks & Spencer operate. If they charge too high a price, people will flock to their rivals, and they will go out of business. Knowing that, they charge much lower prices than they would like to, and work hard to be efficient.
We need universities to do the same. At the moment universities seem content to do what they have always done, and raise fees as much as is necessary. The only exception is London Met. Not only have they announced much lower fees than other superficially similar universities, but they have announced plans to cut costs to allow these fees to work financially. They have reduced the number of courses from 557 to 160. The aim is to offer large quantities of teaching, but to ensure that each course has sufficient people to be economic. This is not easy to do – there is a lot of opposition, some of it nothing more than vested interests.
We need other universities who do not want to follow London Met to feel obliged to, for fear that government will give London Met “their” places. When that happens we will get a lot of good value courses. Until then, we will not. Competitive systems only work when institutions fear each other. That is why the quota system must go. It is as simple as that.
Dr Tim Leunig is chief economist of CentreForum, the liberal think tank. He has just published Universities Challenged, which sets out how to ensure that the new system delivers value for money for students and taxpayers. He also teaches at the London School of Economics.
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