UK higher education finance: what’s the problem and what can be done?

The tripling of tuition fees in 2012 put universities in a strong financial position. But since then, fees – and the maintenance loans that support students – haven’t kept up with inflation. Now, students face real hardship and some universities seem to be in deep financial difficulties.

England’s once world-leading higher education system has become increasingly fragile, with students suffering from real financial hardship, and some universities rumoured to be on the verge of bankruptcy.

The current situation sits in stark contrast to that of 2012, where the tripling of tuition fees to £9,000 per year put universities in a strong financial position. At that time, students were also supported by a generous maintenance loan and grants package. So, where did it all go wrong and what are the potential solutions?

What’s the issue?

The current financial system in higher education – implemented in 2006 – consists of relatively high tuition fees and maintenance loans for student support. The most recent major changes came in 2012, with a near-threefold hike in tuition fees (from £3,000 per year).

While the fee hike in 2012 was controversial, an evaluation we carried out several years later showed signs that the system was working well. Enrolments had continued to increase, and while the gap in participation between rich and poor students remained stubbornly wide, fears of a collapse in enrolment among disadvantaged young people failed to materialise.

What’s more, university funding per head, which had fallen to dangerous levels over the previous decades, was slowly beginning to recover.

The success of the system came down to injecting cash into the system through tuition fees and the well-designed income contingent loans system. The latter ensured that no student had to pay upfront fees, and everyone had access to money for living costs. The system provided protection against key market failures – credit constraints, risk and uncertainty, and debt aversion – an economist's dream.

So, where did it all go wrong? In short, with the government's decision not to index-link tuition fees and maintenance loans – meaning that they did not increase automatically at the annual rate of inflation. Since 2012, the tuition fee cap has only been allowed to increase once, by just £250 a year. The net result is that fees are now worth 30% less than in 2012.

Meanwhile, maintenance loans – the sole source of government support for students’ living costs since maintenance grants were abolished in 2016 – have fallen by 10% in value since 2021, causing real financial hardship for students.

Student liquidity (which comprised maintenance grants and loans until grants were abolished, and maintenance loans thereafter) reached record levels in 2021 (see Figure 1). But since then, it has steadily fallen, so that the poorest students have had around £1,200 less per year in real terms since 2021, and are worse off, in real terms, than they were in 2016.

Figure 1: Maximum value of standard maintenance grant and loan

Sources: Funding from all sources – statistics for 2000-02 are taken from Carpentier (2004) and statistics for 2002-21 from Higher Education Information Database for Institutions. These figures are not available for 2015, 2016 and 2017. Full-time equivalent (FTE) enrolments used in the computation contain all student types (full-time, part-time, postgraduate, undergraduate, UK, EU, overseas); funding per head is for all students and comprises teaching grants and tuition fee income (the latter for all student types listed above). Funding from domestic students taken from Institute for Fiscal Studies (2023) – total upfront public resources provided for teaching. This is effectively tuition fees for domestic students (minus any fee discounts) plus teaching grants. Figures expressed as funding per student per year. All figures expressed in constant 2023 pounds sterling.

Figure 2 plots university funding per full-time equivalent student, both for ‘domestic’ undergraduate students and all student types, including postgraduate, undergraduate, UK, European Union (EU) and overseas students (who typically pay higher fees). Fees have essentially been frozen since 2012, which means that university income from domestic students has been in decline, with levels now back down to those seen in 2011.

The funding shortfall has resulted in universities turning to uncapped fees from international students as an important source of income. International students now outnumber domestic students at the postgraduate level. And overall, international students accounted for 42% of higher education course fees and 21% of all income for universities in England in the 2021/22 financial year.

Figure 2: University funding per student

Funding from all sources – statistics for 2000-02 are taken from Carpentier (2004) and statistics for 2002-21 from Higher Education Information Database for Institutions. These figures are not available for 2015, 2016 and 2017. Full-time equivalent (FTE) enrolments used in the computation contain all student types (full-time, part-time, postgraduate, undergraduate, UK, EU, overseas); funding per head is for all students and comprises teaching grants and tuition fee income (the latter for all student types listed above). Funding from domestic students taken from Institute for Fiscal Studies (2023) – total upfront public resources provided for teaching. This is effectively tuition fees for domestic students (minus any fee discounts) plus teaching grants. Figures expressed as funding per student per year. All figures expressed in constant 2023 pounds sterling.

What are the potential solutions?

The obvious solution is simply to raise fees and maintenance loans back to the levels deemed appropriate in 2012. This would involve a fee increase of £3,000 per year. The new government is unlikely to want to go down that road, both because of the unpopularity of tuition fees, but also because increasing the fee loan would contribute to the budget deficit.

But the government has also acknowledged that something will need to be done. So, should they continue with the current system, and simply change the parameters (most likely increasing fees and possibly maintenance loans)? Or, as they have also hinted, should they change the funding model altogether?

In our new Centre for Education Policy and Equalising Opportunities (CEPEO) briefing note, we discuss four potential funding models:

A free tuition system (that is, the system that was in place in 1997).
The system proposed by the Browne report – the last major review of higher education funding and student finance, which was conducted in late 2010.
A graduate tax.
The current system.

We consider the pros and cons of each in simple economic terms, from the point of view of the four main stakeholders in higher education finance: students, universities, graduates and taxpayers.

We conclude that all of the alternatives to our current system have their merits, but they also have serious downsides.

Free tuition

A free higher education system would be simple to implement and would no doubt be popular with students and graduates (though less so, if they were told how expensive it would be for taxpayers). It would also avoid the ‘debt aversion’ so often cited as an issue for students from poorer backgrounds.

But it would be incredibly costly to implement, bringing with it the real threat of even less funding for universities, and for students themselves. A sector solely funded by the state also risks losing out to other priorities. This would also negatively affect universities’ ability to plan, as they would have very little control over student numbers or state total funding.

The Browne proposals

The system proposed by the Browne report involves giving universities free rein to charge the fees they want, but with a ‘levy’' for each additional £1,000 charged over a basic amount. This is desirable from an economics point of view since it makes it possible to have higher cost courses for those who want to invest more in their education, and it establishes a connection between price and quality.

But there is not a one-to-one relationship between the stated tuition fee and what graduates go on to repay (given that the latter is based on earnings). As a result, this system could create perverse incentives. For example, a student with the grades to access an elite institution may as well pay ‘top dollar’ to do so, since they will only ever repay a percentage of their income.

A graduate tax

There are many proponents of a graduate tax, and again this has many desirable qualities. It is simple and progressive, and young people are unlikely to have the same fears of debt that are often highlighted in the media. This comes with the bureaucratic costs of tracking workers’ qualifications, and complications due to both inward and outward migration.

The biggest downside of this option is perhaps that the taxpayer would have to fund the system itself entirely until the first cohort of students graduated (and potentially for some years after that, given low repayment rates). This issue may be the ultimate reason why no other country in the world has made the transition to a graduate tax.

The current system

In the end, we conclude that retaining the current system – with some changes to the parameters – is the best option. The system has many desirable features, particularly the income-contingent loans element, which ensures that no one pays anything upfront and that repayment burdens are kept relatively low. The system also affords universities a degree of autonomy, as they are not purely reliant on the government to set their income.

We therefore believe (as others have) that the most sensible option would be to begin the process of restoring university and student finances towards their 2012 levels – in a phased manner, rather than as a one-off – and to ensure that fees and maintenance loans are index-linked going forward.

Restoring maintenance grants for low-income students should be part of this strategy. This would be politically popular and potentially cushion the negative effects of fee increases, and it may not be too expensive.

While the temptation may be to reform the system entirely, it is important to remember that the fundamentals of the system are good. And while reform is likely to involve increasing the budget deficit, as chancellor Rachel Reeves points out, borrowing to invest can be desirable if it leads to economic growth. Investing in the education of the population is a proven way to do that.