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Interest rate changes could challenge universities, student loans and post 16 and vocational education

by Sir Adrian Webb

The publication on 13 September 2023 of the House of Lords Industry and Regulators Committee report on the Office for Students drew attention to the financial challenges facing universities in the UK and to the challenges associated with regulating and overseeing these risks.  

This week we look set to see these challenges increase with the possible increase in the  base interest rates by the Bank of England (the “Bank Rate”) to 5.5% when the Monetary Policy Committee next meets on Thursday 21st September (Guardian, Financial Times, 24 August 2023 ). If there is another 0.25% increase in the base rate, as is widely anticipated, this will place government and university finances under further pressure over the next few years with significant negative implications for HE students, the UK Government’s education budget in general and the further education college budget in particular. Furthermore, this anticipated rise in the Bank Rate may not be the last of these increases if Government spending remains high and inflationary pressures persist through the winter months. 

The most immediate and direct effect will be on the interest payments that universities need to pay on short term loans. According to HESA, average HE provider debt as a proportion of turnover stands at 0.16%, but with highs of 454% and lows of 0%, with unrestricted reserves of 204% of income (HESA, 2023). Of course, financial indicators expressed as a percentage of income for institutions of very variable sizes give no feel for the absolute amount of cash owed, or the annual cost of repayments.  

The top 13 higher education providers by percentage of debt are all small private institutions; most have recorded deficits in recent years and appear to have low levels of cash available to cover running costs. The next 35 institutions by scale of debt all have debt levels of over 50% of turnover. Among these institutions there are 22 large pre- and post-92 universities in all parts of the UK.  

The challenges presented by potential increases in interest payments will be exacerbated over the next two years by the continued decline in the real value of student tuition fees, limitations on the recruitment of overseas students with dependants and a decline in the proportion of students applying to low and mid-tariff universities.  

When student tuition fees were first introduced, HE providers were encouraged to set fees at between £6,000 and £9,000 per annum. Some price competition between institutions was expected but in practice the vast majority set their fees at the higher level. Recent analysis by Mark Corver of DataHE, an independent higher education consultancy, indicates that the real level of fees that higher education providers charge students as tuition fees has dropped below £6,000 if the value is deflated by the Retail Prices Index (RPI), slightly higher if other measures of inflation are used.

Over the last five years, many HE providers have been attempting to cover the reduced value of undergraduate home tuition fee income by recruiting larger number of international students, particularly from China, India and Nigeria. This approach has attracted large numbers of students to the most selective universities and those in major cities; many universities now have more than 25% of their students recruited from these sources. The announcement of restrictions on the release of temporary visas to support the dependents of international students has already had an impact on the recruitment of people from overseas who want to study at UK universities.. This impact looks set to continue and increase in 2024. 

To illustrate the issues faced by the more highly indebted institutions with a significant number of international students, consider the composite case of the University of Camberwick Green, with net debt of circa £200m and current loans with a weighted average debt cost of 3.5%. If this institution needed to renew all of its existing debt obligations this would likely double the costs of debt servicing from £7million to at least £14million. This would mean an additional annual outlay as a proportion of turnover in excess of 5%, dependent on the interest rates agreed with lenders and the term of their loan (e.g. revolving credit facility, private placement, bond or bank lending).  For a university like Camberwick Green, which has also recorded large operating deficits in recent years, additional debt is likely to be more expensive and so the short-term options are likely to focus on selling assets or laying off staff; these are not easy or attractive options. Changes to course portfolios and/or increased international student recruitment and transnational operations are unlikely to produce the necessary returns quickly and without undue financial or reputational risk.  

The more prestigious and selective universities in the more affluent parts of the UK are unlikely to face pressures that are likely to bear down hard on those which are, by conventional measures, less prestigious and less selective, in parts of the UK that engaged in levelling up activities with significant HE involvement. The impacts of high indebtedness, declining student recruitment and operating deficits are already being felt with significant redundancies planned at ten universities. 

The next most significant impact of higher interest rates will be on student loan repayments and the arrangements for funding this activity. The student loan book currently stands at £206bn with an additional £20bn of loans being issued each year. The internal real interest rate charged on these loan arrangements by HM Treasury, i.e. the real discount rate (excluding inflation), was set at -0.7% in 2021 at the height of the Covid crisis and remains the rate proposed in the Plan 5 changes scheduled to come into place during 2024. The nominal discount rate taking account of inflation is 1.9%. If Bank of England interest rates and by consequence HM Treasury bond/gilt rates move to 6.25% in 2024, as has been forecast, and the student loan rate is changed as a consequence, this will create an adverse upward movement in real interest rate charges on the loan book of circa 5%. Dependent on the scheduling of the loans this will then feed through into the calculation of the principal debt students are required to repay and also the Resource Allocation Budget (RAB) charge paid by the UK Government on loans that are forecast not to be repaid. Under revised accounting rules introduced in 2021, a proportion of this increased RAB charge will need to be accounted for in the national deficit in the year it is incurred and cannot be delayed until the loan matures. With forecast increases in the scale of the student loan book through to the next decade there are likely to be powerful voices in the Treasury wishing to pay down this debt or reduce the scale of its growth. This in turn is likely to mean a need to revisit the current arrangements in advance of the next HM Treasury Comprehensive Spending Review (CSR) in 2025. 

The current loan book is financed in part by the spread (difference) between the notional interest rate charged to students on loans they have taken out, which is currently set with some reference to the Prevailing Market Rate (PMR) for commercial loans, and the lower rate paid by the Treasury for its borrowings. The PMR was set at 7.3% in February 2023 and confirmed at this level for the period between September and November 2023 on 11th August. . At present the Bank of England Bank Rate is 5.3% and so the spread between the student loan rate and the Bank Rate was 2%. If a similar spread is expected if  the base rate rises further to 6.25% the PMR could be 8.25% or even higher. Interest rates at this level would make almost all student loans un-repayable, effectively converting the loan system into a graduate tax confined to new students and also potentially introducing a significant element of “moral hazard” as many students would face little incentive to do anything other than maximise their student loans. Given that they will never repay them; they will face an additional marginal loan repayment (tax) rate of 9% on undergraduate loans and 6% on postgraduate loans, so why not take out as much loan as possible and complete a postgraduate taught or research degree, even when the economic returns to them individually and to the public purse are negative. Beyond this “moral hazard” argument there is also arguably a “moral outrage” argument to be had about imposing an age-related differential income tax rate on younger people who are recent graduates. 

The problems outlined above are then likely to be heightened by forecast increases in the number of prospective undergraduate students entering the system over the next seven years.  In 2021/2022 there were 2.16 million U.K. domiciled students in UK HE institutions and a further 0.68 million students from the EU and other overseas countries. By 2030 the number of UK domiciled students is expected to increase by between 200,000 and 400,000 as a consequence of increases in the number of people in the relevant age groups. This would be at an average additional cost per student of at least £60,000 per three-year undergraduate degree, based on loans for tuition fees of 3 x £9,250 and for maintenance of 3 x up to £13,022 for students living away from home in London. Many students study for longer than three years on foundation and/or masters programmes, hence the forecast of £60,000 per student. This is an additional annual cost of loan outlay of £12bn or more. This seems unlikely to be fundable. 

The implication of these cost pressures would be serious enough if they were confined to HE, but they are not. Far from it. At present the growing costs of HE are being paid for by other parts of the UK Government’s education budget, resulting in real terms cuts to the further education budget, consequent low rates of pay for FE college staff, and cuts to the adult education budget. In adult education, FE and apprenticeship provision pay rates are set locally rather than nationally and so reductions in institutional budgets in this part of the education sector have tended to be accommodated by falling wages and unfilled vacancies rather than through redundancies as has been the case in the university sector. These different parts of the post-school education system are making greater use of part-time and temporary contracts and precarious jobs. This at a time when the need for more and better vocational education is increasingly widely recognised and the need for “industry standard” staff capable of delivering the new and upgraded skills required by rapid technological change has never been greater.  

Across the UK 70% of adults have not been to university, but like many older graduates they would benefit from the opportunity to take a course at a local college or other adult education provider. With 20% of the adult working age population (5 million people) currently economically inactive and with chronic skills shortages in all parts of economy it is very worrying that the pay of college lecturers in catering, construction, digital, engineering, health and social care is considerably below the rates paid to comparably skilled people working in the private sector. Employers in the UK spend on average 50% less than their counterparts in mainland Europe on workforce education and training. The combination of reductions in employer spending on training and cuts in UK Government funding for FE and apprenticeships has led to a reduction of over 1 million student places in adult education, apprenticeships and FE per year in the last ten years. This is not the position the UK needs to be in to improve productivity. Indeed, it is the very opposite of what is required to support such mission – let alone to promote inclusive and sustainable economic growth.  

Who is responsible for monitoring and governing this system? At the moment the financial position of individual universities is overseen by their governing bodies, aided by internal and external auditors predominantly drawn in combinations of two of the big four audit firms. The Office for Students (OfS) monitors the financial position of individual higher education providers as part of its regulatory function, but it is not formally required to intervene financially at an early stage to support institutions in difficulties. It may issue a requirement to improve the plans for protecting students, but it is not required to prevent an institution from failing. The Student Loan Company (SLC) is overseen by an independent board and supported by a representative from the sponsoring departments in the UK’s national governments (i.e. Department for Education, Scottish Government, Welsh Government and Northern Ireland Office in the absence of the Northern Ireland Executive). Whether the OfS, national regulators in the devolved nations or the SLC have modelled the scenarios outlined in this note is a moot point. Indeed, it is more of a mute point because no one is publicly talking about these issues and the problems that go with them in a joined-up way with a long-term perspective. It would be helpful if they did, and if there was a debate about the consequences for higher and further education providers and student loans of the return to real interest rates more in-keeping with the long run historical average. Given the commitment of central banks around the world to move in this direction after 15 years of ultra-low interest rates there is a pressing need for a comprehensive review of where we are heading and what needs to be done about it. 

As we approach a General Election in 2024, now is the time for the major political parties in the UK to commit to the appointment of a Royal Commission or equivalent to look at these issues with an impartial, sector neutral and critical eye.  Over the last hundred years all major changes of this type have proceeded in this way (i.e. Smith Report 1919, White Paper on Education 1943, Robbins Review 1964, Dearing Review 1997 and Browne Review 2011). Indeed, in 1997 Gillian Sheppard (Conservative minister) and David Blunkett (prospective Labour minister) agreed in the run up to the General election to respect the Dearing Committee proposals. A similar arrangement was reached regarding the Browne Review between Peter Mandelson (Labour Minister) and George Osborne (prospective Conservative Minister) in the run up to the general election in 2010.  The settlements in 1944 and 1963 were similarly effectively cross-party. This is a fundamental issue for the future of the UK and deserves to be made non-political with recommendations for the long term. Previous reviews have produced long term plans which have been implemented when they had cross-party support and straddled a General election. 

Sir Adrian Webb was an academic at the London School of Economics and Loughborough University; he was Deputy Vice Chancellor at Loughborough and Vice Chancellor at the University of Glamorgan. As well as holding a number of senior management positions and a wide range of public service/consultancy roles in local and central government (including HM Treasury, DHSS, Home Office, DFES, and the Ministry of Justice) and in Wales, he has also held many roles in the Third Sector. Sir Adrian was a member of the Dearing Review committee in the late 1990s and chaired a review of further education colleges and funding in Wales in 2007. 

The views expressed in this article are those of the author and do not necessarily represent the views of any organisation with which the author is affiliated.  


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What do students think about value for money?

by Kristina Gruzdeva

In 2022, the cost of living crisis meant communities across the UK had to adjust their behaviours and their spending. Many needed to learn to navigate within a complex energy market. Prospective university students were in a similar position, being expected to make a cost-conscious decision about their degree education with limited understanding of their options. In research conducted for my PhD, I invited first-year students to participate in focus groups to explore their orientations to their degree. Students were recruited through online and on-campus campaigns that were run in the autumn of 2019/20. The overall sample consisted of 51 participants (39 female, 10 male and 2 non-binary; 28 from ethnic minority groups; 14 were ‘first in family’ students). All participants were first-year students who started their degree at a Russell Group University, with a balance across all five faculty groupings in the university. I developed a typology to show how students perceive their degree, their beliefs about the financial implications of going to university and how they define value for money. In England, undergraduate fees of £1000 were introduced more than 20 years ago, raised to £3000 in 2006, and to £9000 more than ten years ago. My findings suggest that even now, five years after the Higher Education and Research Act legislated for an HE market, it is problematic to rely on informed student choice as a basis for the market’s operation.

Students in the first category of the typology view their degree as an essential requirement for their career. Students in this category are enrolled in STEM or Medicine courses and have a clear idea of what they would like to do upon graduation. Their family background is diverse, with some choosing to follow their parents’ footsteps, and others being first in their family to go to university. Students in this category hold shared views on employability, graduate salaries, and value for money. The data show that employability and career aspirations are important to first-year students transitioning into HE (Mullen et al, 2019). Metrics of graduate employability gave these students some reassurance and helped them to narrow down their options in choosing courses. These students did not look for information about graduate salaries and explained this by studying for a degree that leads to in-demand jobs. They comment that information about graduate salaries was “already there” when they looked for other kinds of information about their degree. Students who view their degree as an essential requirement report that their degree provides good value for money.

The second category of students described their degree as an investment. These students also had a career-oriented approach to their education, but their career plans were less defined compared with the plans of students in the first category. They studied a wide range of degree courses and came from diverse backgrounds. When asked about their awareness around employability, some students reported that they had come across information about it, whereas others said that they did not know much. When prompted to explain why they did not search for such information, these students suggested their career plans had not crystallised yet, so they were not sure how to interpret such information and to what extent it would be relevant to them. As in the first category, these students reported that they did not look for information about graduate salaries. They assumed such information would not be relevant because they had not yet decided what to do upon graduation. They had a mix of views on value for money. Some believed that their degree would offer good value for money because it would open doors to many opportunities, whereas others had a different opinion. Perceptions of poor value for money were related to instances when students’ expectations had not been met. For example, a few students had expected more contact hours. Others had expected that their maintenance loan would cover the costs of their accommodation.

The third category of students described their degree as a desirable experience. These students were enrolled in Social Sciences and Humanities courses. Importantly, these students came from families where at least one parent holds a degree. Their decision to study at university was driven by their academic interests or a belief that getting accepted onto a course would be easy. When asked about whether they considered employability metrics, these students said that they did not. They also did not look for information related to graduate salaries. One student, reflecting on her decision to study at university, suggested that prospective students had tunnel vision and were not concerned about their career prospects. Two individuals commented that education is not about jobs and appeared to look down on the other members of their discussion groups, who shared the view that their education offered knowledge and skills for work. There was a mix of views on value for money. The social and wider personal benefits of studying for a degree were attributed to good value for money. In this category it was rare to find perceptions of poor value for money; such perceptions came from unfulfilled expectations related to contact hours.

Student career aspirations, or lack thereof, played a dominant role in shaping students’ views on their education and how they perceived value for money. Most students in my study did not actively search for information related to employability or graduate salaries; rather, they assumed the economic value of their degrees. These findings challenge the consumer-oriented approach to HE because focus group participants did not appear to act as informed consumers, which is problematic in an HE sector supposedly driven by market imperatives.

Kristina Gruzdeva is a Research Facilitator at the University of Birmingham. Kristina’s research interests are in higher education policy, mainly in relation to student finance, student choices, and marketisation. This blog is based on a chapter from her recently completed PhD. Email: k.gruzdeva@bham.ac.uk

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Who should pay for higher education in England, and how much

by Rob Cuthbert

SRHE News is a quarterly publication, available only to SRHE members, which aims to comment on recent events, publications, and activities in a journalistic but scholarly way, allowing more human interest and unsupported speculation than any self-respecting journal, but never forgetting its academic audience and their concern for the professional niceties. These are some extracts from the April 2022 issue.

Government uses high inflation as cover for hitting students, graduates and universities

The Government sneaked a student loans announcement out on Friday afternoon 28 January 2022. Ben Waltmann (Institute for Fiscal Studies) said: “Today’s announcement … constitutes a tax rise by stealth on graduates with middling earnings. … For a graduate earning £30,000, this announcement means that they will pay £113 more towards their student loan in the next tax year than the government had previously said. … What really matters is how long this threshold freeze will stay in place. If it is only for one year, the impact on graduates will be moderate, and the government can only expect to save around £600 million per cohort of university students. If it stays in place for longer, it could transform the student loan system, with a much lower cost for the taxpayer and a much higher burden on graduates than they thought … when they took out their loans.” However, some well-informed commentators thought that the Minister had made the best of a bad job.

Waltmann followed up in his 10 February ‘Observation’: ”Students will see substantial cuts to the value of their maintenance loans, as parental earnings thresholds will stay frozen in cash terms and the uplift in the level of loans will fall far short of inflation. This continues a long-run decline in the value of maintenance entitlements. The threshold below which students are entitled to full maintenance loans has been unchanged in cash terms at £25,000 since 2008; had it risen with average earnings, it would now be around £34,000. Separately, the student loan repayment threshold will also be frozen in cash terms. … Finally, tuition fees will remain frozen in cash terms for another year, which hits universities and mainly benefits the taxpayer. … as our updated student finance calculator shows, the government is saving £2.3 billion on student loans under the cover of high inflation.”

At last, the government response to Augar

On 24 February 2022 the government finally issued a detailed response to the 2019 Augar Report, setting out a series of policy proposals and further issues for consultation: “Put simply, we need a fairer and more sustainable system for students and institutions, and of course the taxpayer. We need a system that will maintain our world-class universities not just for today, but for the decades to come. And we need a fairer deal for students …”. Rachel Wolf wrote for The Times Red Box on 24 February 2022 that she was encouraged by the Augar response (and the separate consultation on Lifelong Learning Entitlement), because it suggested that there was proper Cabinet government with a sensible Secretary of State for Education, rather than No 10 being in charge of everything. Yes, but … there was precious little welcome for most of the proposals.

Nick Hillman blogged for HEPI just ahead of the DfE announcement, trying desperately to save the Willetts fee policy (he was Willetts’ special adviser) from being labelled as a political failure. That policy was designed to be redistributive and progressive, but in practice the shortfall in repayments (RAB) became much too high and not enough people understood that many students were not expected to repay loans in full. The Theresa May government misunderstood it to the extent that they raised the repayment threshold, which cost the Exchequer much more without giving much benefit to students. The Treasury tolerated it until the national accounting systems were properly changed to show the loans for what they were, rather than spreading them as a cost over 20-30 years. Hillman selectively quoted Moneysavingexpert Martin Lewis, but he would have done better to see the 24 February Lewis quote that loans had now become a graduate tax throughout people’s working lives.

Jim Dickinson for Wonkhe on 24 February 2022 noted the absence of any response to Augar’s chapter on maintenance grants: “Overall then, almost all students will end up paying significantly more for having significantly less spent on their education … we might have at least expected a response on the bits of Augar that were concerned with students’ costs or their maintenance. That they are not even acknowledged tells us quite a bit about what the government thinks about students and graduates.”

Gavan Conlon of London Economics issued his analysis of the government proposals. “Under the current funding system in 2021-22 … the Exchequer contributes approximately £10.630bn per cohort to the funding of higher education. … given that the RAB charge (the proportion of the total loan balance written off) stands at approximately 52.5%, maintenance loan write-offs cost the Exchequer £4.105bn per cohort, while tuition fee loan write-offs cost £5.303bn. The recent freeze in the repayment threshold reduced HMT costs by approximately £300 million. The provision of Teaching Grants to higher education institutions (for high-cost subjects) results in additional costs of £1.222bn per cohort. Higher Education Institutions receive £11.144bn per cohort in net income from undergraduate students … £10.112bn in tuition fee income … £1.222bn in Teaching Grants. … institutions contribute £189 million per cohort in fee and maintenance bursaries (predominantly the latter) in exchange for the right to charge tuition fees in excess of the ‘Basic Fee’ (£6,165 per annum for full-time students). For students/graduates, the average debt on graduation (including accumulated interest) was estimated to be £47,500 (for full-time first degree students), with average lifetime repayments of £35,900 for male graduates and £13,900 for female graduates. We estimate that 88.2% of all graduates never repay their full loan, while 33.0% never make any loan repayment.” The first scenario he modelled involved “removing the real interest rate, reducing the earnings repayment thresholds to £25,000 (and the associated maximum interest rate threshold), and extending the repayment period to 40 years”. That led to savings of £539million for the Exchequer, with no change for HEIs. The average debt on graduation declined following the changes by £1,600. Average lifetime repayments for male graduates  decline by £2,000 but increase by £3900 for female graduates. “However, these are averages and there are important distributional effects associated with these proposals”. Scenario 2 added the introduction of Minimum Entry Requirements and reintroduction of Student Number Controls. The savings for the Exchequer were estimated at £1322million, with a loss for HEIs of £840million. The effect on students was unchanged.

Conlon then co-authored a blog with Andrew McGettigan (independent) for Wonkhe on 25 February 2022, which showed that most of the savings had actually been achieved by changing the discount rate used for student loans, making them more valuable. “… the graduates who will benefit the most are the highest earning – predominantly male – graduates. The messaging has been that lower earning graduates need to pay more to make the system sustainable. In fact it’s the discount rate change that does most of that – with the extra contributions from lower earning graduates helping to fund the reduced contributions from the richest. … It’s hard to see this when there is a lot of smoke and mirrors. What makes all this worse is the government knows that its discount rate change means that the extra payments made by lower earning graduates in years 30 to 40 are doing most of the heavy lifting.” Student finance campaigner Martin Lewis of Moneysavingexpert called it “a very damning piece”.

Ben Waltmann of the Institute for Fiscal Studies wrote on 24 February that: “The largest student loan reform since 2012 will reduce the cost of loans for high-earning borrowers but increase it for lower earners. Today the government has announced the largest changes to the student loans system in England since fees were allowed to triple in 2012. Starting with the 2023 university entry cohort, graduates will pay more towards their student loans each year and their loan balances will only be written off 40 years after they start repayments. For the same cohorts, the interest rate on student loans will be reduced to the rate of increase in the Retail Prices Index (RPI), a large cut of up to 3 percentage points. Maximum tuition fees will be frozen in nominal terms until the 2024/25 academic year. These changes will transform the student loans system. While under the current system, only around a quarter can expect to repay their loans in full, around 70% can expect to repay under the new system. This is partly due to substantially higher lifetime repayments by students with low and middling earnings and partly due to less interest being accumulated on loans. The long-run benefit for the taxpayer will be around £2.3 billion per cohort of university entrants, as higher repayments by borrowers with low or middling earnings will be partly offset by lower repayments of high-earning borrowers.”

Richard Adams in The Guardian on 24 February 2022 pointed out the DfE’s own analysis showed the poorest would suffer: “An equality analysis on the proposals by the Department for Education, states that “those likely to see some negative impact with increased lifetime repayments under the reforms” include younger and female graduates as well as graduates “from disadvantaged backgrounds, or reside in the north, Midlands, south-west or Yorkshire and the Humber”.

On 24 February 2022 Wonkhe’s Debbie McVitty suggested the proposals were looking for “a third way between capping opportunity and letting the HE market run amok”. John Morgan’s article for Times Higher Education on 28 February 2022 had expert commentators describing the Augar response package as a ‘missed opportunity’, with Chris Husbands (Sheffield Hallam VC) saying “what the package essentially does is to kick the difficult questions down the road”. David Willetts, in Times Higher Education on 3 March 2022, thought the Augar response was “balanced tweaks”; he was trying to rescue his fees policy, which worked in theory but not in practice. Nick Hillman was still trying in Research Professional News on 6 March 2022.

Universities Minister Michelle Donelan wrote a Conservative Home-spun version of the changes, in which she interestingly she referred to “Our top university cities – Cambridge, Oxford, Bristol, Manchester and London …”. Donelan’s speech to the Conservative Party Conference in March 2022 set out what the Minister wants the narrative to be. Diana Beech (London Higher) blogged for HEPI on 7 March 2022 about the government response to Augar and the recent flurry of OfS consultations: “… what we are facing now is not a series of seemingly independent consultations concerned with the minutiae of regulation, but a multi-pronged and coordinated assault on the values our higher education sector holds dear.” Alan Roff, former Deputy VC at Central Lancashire, reprised his 2021 argument for a graduate contributions scheme with his 22 March HEPI blog. We assume that still, no-one in government is listening.

Mary Curnock Cook, former UCAS chief executive, was upbeat about the possibility of setting a minimum entry requirement (MER) in terms of grade 4 English and Maths at GCSE, in her HEPI blog on 24 February 2022. However SRHE Fellow Peter Scott pointed out, in his 28 February 2022 HEPI blog, that “In Scotland, universities set MERs to widen access. In England, the State imposes MERs to curb it. So, it is very difficult to claim the UK Government’s package of measures in response to the recommendations made by Augar are somehow progressive, let alone favourable to fair access.”

Rob Cuthbert, editor of SRHE News and Blog, is emeritus professor of higher education management, Fellow of the Academy of Social Sciences and Fellow of SRHE. He is an independent academic consultant whose previous roles include deputy vice-chancellor at the University of the West of England, editor of Higher Education Review, Chair of the Society for Research into Higher Education, and government policy adviser and consultant in the UK/Europe, North America, Africa, and China.

Email rob.cuthbert@uwe.ac.uk, Twitter @RobCuthbert.

To join a global community of scholars researching into HE, see the SRHE website.


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Is it possible to bring back the block grant?

by GR Evans

The Government’s latest plan for university funding in England makes depressing reading for future students and universities alike. Students will be paying off their student loans (albeit with slightly reduced but still compound interest), for forty years not thirty. Universities will have the tuition fees funded by their loans capped at £9,250 a year until 2025, making seven years since they were last (slightly) increased.  Yet this can be no more than a holding move in the face of a current student loan-book total of more than £160bn.

The scale of that student debt was not supposed to matter. When loans for student fees began they were considered to be a mere supplement to the Government ‘grant’ of public funding for universities. The write-off of unpaid student debt after 30 years would not count as a loss to the tax-payer in the eyes of the Treasury.

The Coalition Government’s decision in 2010 to triple student fees to £9,000 and  shrink the ‘block grant’ to vanishing point made that view of things impossible to sustain after 2012.  In 2019 the Office for National Statistics redesignated the write-off of student loans as public spending. The now only too visibly mounting £billions have become a major embarrassment. The current proposal to limit student numbers by imposing minimum entry qualifications for students is designed to ensure that fewer loans are taken out, but the system is clearly not sustainable in the long-term.

The ‘block grant’ imposed no debt upon students until tuition fees were introduced in 1998, and until they rose to their current levels the debt was not crippling. Now it is, and it weighs on the taxpayer as well as the student. The Government ‘grant’ was clearly taxpayer money spent, but it could be measured out year by year, was a known quantity, and once spent could not still be costing the taxpayer unforeseen amounts decades later. It was regularly grumbled that fixed annually it gave universities little chance to plan ahead, but that problem has not been removed by leaving universities to gather what fees they can by admitting students.

Funding by Government grant served universities for almost a century from 1919, The call for it began in earnest at the beginning of the twentieth century, once half a dozen new universities had been founded and needed it. In 1918 the Vice-Chancellor of Birmingham University, Sir Oliver Lodge, set about organizing a deputation ‘for the purpose of applying to the Government for greatly increased financial support’.

One point of principle quickly became important. In 1919 Oxford’s scientists wrote directly to H.A.L. Fisher, President of the Board of Education, to press for money for salaries for demonstrators and scholarships in science and mathematics. The very future of science was at stake, they cried. This prompted a clarification. Fisher explained that:

‘each University which receives aid from the State will receive it in the form of a single inclusive grant, for the expenditure of which the University, as distinguished from any particular Department, will be responsible’ (Oxford University Gazette (1919), p475).

This established the ‘block’ character of the grant’.

The second important principle was that Governments must not be able to attach conditions to the grant however they pleased. As Lord Haldane argued, there must be a buffer or intermediary. From 1919 until the creation of the statutory funding bodies under the Further and Higher Education Act of 1992 that took the form of the universities-led University Grants Committee. After 1992 HEFCE always received a guidance letter from the Secretary of State at the beginning of the year, giving a steer about the way in which the block grant should be allocated, but it continued to take its ‘buffering’ duty seriously.

In Times Higher Education on 24 February Aaron Porter told the story of the shrinking of the ‘block grant’ by the Coalition Government and its almost total replacement since 2010 by greatly enlarged student tuition fees. Those of course were in principle payments for teaching,  but there were soon complaints that they were being used to fund research.

The Higher Education and Research Act of 2017 made a decisive separation between teaching and research by creating the Office for Students and UK Research and Innovation. The equivalent of the old ‘grant letter’ now comes to the Office for Students from the Department for Education. The most recent of these is dated 9 August 2021. The Higher Education and Research Act 2017 (HERA s.2(3)) empowers the government to give ‘guidance’, ‘setting out the principles which should be followed in distributing the funding’.  UKRI, which bundles together a number of entities, takes the form of a non-departmental government body, under the Department for Business, Energy and Industrial Strategy. Its funding by the Secretary of State preserves the ‘buffer’ or Haldane principle, as defined in HERA s.103, but not the principle that such funding should go in a ‘block’ to each university.

This means there would now be a significant structural difficulty in restoring a ‘block grant’ as the principal source of funding for universities, because it could under current legislation affect only the cost of ‘teaching’. But legislation can be amended and there is unfinished business, because the separation of teaching and research has left research students inadequately supported.

What is the alternative? The present adjustments are unlikely to be sustainable in the long term. Freezing tuition fees cannot continue indefinitely, or even for the period to 2025 now proposed by government, without causing some universities to collapse. In a report on 9 March 2022 the National Audit Office warned that OfS and the DfE had to improve trust in their regulatory processes, with ten institutions already subject to ‘special monitoring’ because of doubts about their financial sustainability. Whether students will be willing to pay off their loans for longer and longer periods remains to be seen. (The possibility of restoring ‘free tuition’ was a prominent issue in the recent US presidential election. Although it remains unlikely at present, it suggests that such a change might come back onto the policy agenda in England.) The 40-year repayment period now adopted by government is in effect a ‘graduate tax’; the revenue from loan repayments might be more efficiently and progressively collected via tax simplification, rather than the imposition of what appears to graduates to be a significant debt to be repaid throughout their working lives. It might be time to give serious consideration to the restoration of a true block grant.

SRHE member GR Evans is Emeritus Professor of Medieval Theology and Intellectual History in the University of Cambridge.

Ian Mc Nay


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A period of reflection

By Ian McNay

At the beginning of what some people mistakenly think of as the beginning of a new decade – who counts to ten by starting at zero and finishing at nine? – the pressure is to reflect on the past and project for the future. I am going to mainly eschew the former, but do have concerns for the next five or ten years. In other countries where a populist government has been elected, and moved to authoritarianism, such as Hungary, Turkey, or even the USA, the auguries are not good for higher education. I am not claiming that the new UK administration is as extreme as those examples, but the indications are there about its attitude to dissenting voices – the BBC and Channel 4 coverage of the election, elected parliamentarians defying the party whip, and even the supreme court, to whose rulings the government has twice had to conform, reluctantly, in the interests of constitutional democracy. The manifesto commitment to reviewing the organs of government and the judiciary has been seen by some as ominous.

Whatever the politics, there are other reasons to be concerned for HE. The eight years since fees were last tripled, to £9,000, have been fairly comfortable, financially, for most universities, if not their staff at the sharp end of operations. Marginal costs per student will often be low, especially in non-STEM subjects, so surpluses expand with every expansion of numbers. The Augar Report recommendations, if accepted, may lower fees with little guarantee that government will cover the loss of income. The cost of student loans, some of which now comes within current public spending, will increase dramatically with the demographic bulge in 18-year-olds, starting now, unless the cap on numbers in England is re-imposed, as seems likely, given views on ‘useless’ degrees, unnecessary experts, and pressure to prefer apprenticeships and FE recovery over investing in people who, on graduation, are less likely to vote Conservative than those without a university education. Graduates move to cities where there are jobs, leaving their home communities to an ageing population with different political predilections, made evident in December, and considerable resentment against what they see as graduate elitists in Westminster disregarding their needs and views. That may then convert to resentment against the universities that produce them and whose students affect the availability of property to rent and ‘studentify’ sections of a community. If the low rate of HE access of white working class males, and ‘over-representation’ of British BAME students is added to the mix, there is a base for Powellite stirring in a search for somebody to blame.

HE will not, then, be a high priority among competing, vote-winning, initiatives. Savings from not having to give EU students access to UK loans may not be re-invested. Even for research, where specific protective commitments have been made, the loss of EU funding and the greater difficulty in recruiting and partnering internationally because of visa restrictions, the prospects are not good. UK universities have already begun to drop down international league tables, and there is little reason to believe that that trend will stop. If income becomes tight, consider where funds might come from and the political risks of dependence on Chinese students and partnerships, or grants from oil rich regimes in the Middle East, or big pharma to a greater extent than now. Governors and senior managers will be faced with moral issues, testing the robustness of asserted values.

If universities are to overcome being seen as part of the problem, what has to change? Over the end of year break, I have been reading a collection of essays arising from an event 50 years after Chomsky published ‘The responsibility of intellectuals’. . That is the book’s title; it is edited by Nicholas Allott, Chris Knight, and Neil Smith, published by UCL Press. For us, as individuals who might be regarded as intellectuals, the three responsibilities set out by Chomsky remain: ‘to speak truth and expose lies; to provide historical context, and to lift the veil of ideology’ (Allott et al, 2019:7). The context has changed in 50 years: we ‘speak’, as do others, on social media, where regulation is lax; truth must be told to the powerless as well as the powerful, needing a different level of discourse; there is recognition that ‘the elite need to have an accurate idea of what is going on’ (p10) which means listening to others’ legitimate and valid truths derived from an experience, a background and axioms that differ from those of the people in power; and there is need for active engagement with that alternative reality, not just commentary from a distance, however sympathetic. This may lead to a better informed and value-oriented set of intellectuals.

At institutional level, that applies within universities, too. The gap between the governors, including the senior managers, and the governed is dysfunctional – can you name, say, three lay governors? When did you last speak with one? Some years ago, I reviewed the work of the Greenwich governing body, as recommended in the Dearing Report. It was clear that there was no communication with the governed, either up or down, no communication with ‘constituencies’, since governors could not identify their constituency. There was only an oral report on Academic Board meetings, by the VC, with all other information for the governors coming from the SMT, sometimes incomplete, at times misleading. SMT/staff communication has improved, but is still poor and unsystematic, avoiding anything that might highlight negatives.

As with many modern universities, there are two seats on Academic Board for professors elected by and from the professoriate; this year, as too often in the past, there were no nominations, nobody willing to stand, for a body that has no power beyond ‘advising’ the CEO and where the 1988/92 laws require there to be a majority of people with management responsibilities … on an academic board. My work with staff in many universities suggests that disengagement is widespread: academics have reverted to being what Hoyle labelled ‘restricted professionals’ – classroom based and classroom bound, by choice, since there is a fear of repercussions/reprisals if there is any expression of dissent. So compliance produces conformity, not the creative diversity essential to a healthy academic community. That may also develop at corporate level with the increasingly intrusive regulation by the Office for Students. Interviewing vice chancellors some years ago, even then there was a fear of speaking against ministerial policy, which might result in financial discrimination against their university. There might also be targeted supplementary ‘regulation’ (=control) from the Office for Students. Only in England, of course, which already has more surveillance from government and its agencies than other parts of the UK, as shown by Michael Shattock and Aniko Horvath in their 2019 book The Governance of British Higher Education. Possibly as a factor of size, but only partly, I suspect, transferring Chomsky’s concern over ideology to this context, there is also – Shattock and Horvath, again – less solidarity among the different mission groups, who act like ideological factions in a political party. Perhaps some reflections on common values (echoing urgings in one such party) might bring them together. I recommend reading chapter 5 of the Dearing Report as a basis for a period of reflection on values in an academic (and political) community.

I wish you a good new year, with hope that my concerns prove to be unfounded.

SRHE Fellow Ian McNay is emeritus professor at the University of Greenwich

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HE Finance after Hurricane Adonis

By Rob Cuthbert

So there is to be a review of higher education finance. Probably. But it is still unclear whether it will be a ‘major’ review, whatever that means. It might only mean ‘major enough to see off the threat from Jeremy Corbyn’, but we await most of the detail.

After the June general election the apparent appeal to young people of the Labour Party pledge to abolish fees, and perhaps even write off student debt, sent the Conservative Party into panic mode. Of course it might not have been a pledge, nor even a promise, more an aspiration or a direction of travel. Students have heard that kind of thing before.

Storms were brewing, but no-one expected Hurricane Adonis. Continue reading →

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Post election, Post budget: The shifting landscape of Higher Education in the UK

By Ian McNay

It says something about the Guardian and its reader profile when it builds a crossword round knowing the names of the chancellors of Russell Group universities, as it did on 27 June. I also liked its headline the previous day: ‘New dinosaur found in university store cupboard’. It has now been re-united with older colleagues in the department of economics.

My serious considerations here concern the post-election agenda – what I called Jo-Jo’s in-tray issues in a recent workshop at Coventry (to where/whom, congratulations on their Guardian league table ranking on student views on teaching quality: second only to Cambridge, and, more importantly, above Warwick). That system level policy focus will be balanced by treatment of emergent concerns at institutional level in a later piece.

The most immediate issue is a cut of £450m in the DBIS budget, which may be followed by further longer-term cuts as the failed austerity project continues. Nick Hillman at Coventry suggested an easy step was to convert grants to loans, which reduces the deficit but still increases the debt. I am writing before the budget, but I expect a loosening of fee limits, not ruled out during the election and possibly linked to teaching excellence, with high scorers being allowed to increase fees, as UUK want. Then there will be the sale of further tranches of the loan book, possibly to universities for their own alumni. Research Fortnight expects science to be protected Continue reading →

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Bad News

By Marcia Devlin

The Australian federal government has proposed a budget package that is bad news for higher education. It proposes to: reduce commonwealth funding of programs by a blanket twenty percent and allow universities to charge fees (which they will have to do to make up for the government contribution reduction). Of the ‘profit’ universities make, that is, any portion above the twenty percent that is to be cut from commonwealth funding that universities might choose to charge, the proposal is that one-fifth of that must be set aside to fund scholarships for disadvantaged students.

Australia has the Higher Education Contribution Scheme (HECS) where students pay a proportion of the costs of their study. They can take out a loan with a marginal rate of interest and aren’t obliged to start paying it back until they reach an income threshold. The budget package also proposes to apply a real rate of interest to the HECS loans students take out to pay the now increased fees.

Modelling by Ben Phillips at the University of Canberra indicates that Continue reading →