Understanding the changes in higher education student finance for full-time undergraduates
1 Feb 2011
Emma Pollard, Senior Research Fellow
This is a turbulent time for higher education. The financing of the sector and the support available for students are set to change dramatically, and the impact on both demand and supply is likely to be far-reaching. As we await the government’s White Paper on the future of universities, planned for early this year, it is worth setting out what we know from our portfolio of research about the workings of the current system (at least for full-time English-domiciled students) and of the new plans that are emerging.
Where we are now?
The current student finance system for full-time higher education students in England came into operation in 2006 (with the Higher Education Act 2004). This was introduced by the Labour administration in an attempt to increase the resources available to higher education; and to shift more of the costs of higher education onto the individuals who would benefit from this experience (based on the principle of equity) but at the same time ensure that those who have the talent to benefit from higher education are given the opportunity to do so, regardless of their background (based on principles of social inclusion, widening participation and fair access). This move followed on from the introduction of up-front tuition fees in 1998, which, for the first time, required full-time undergraduate students to contribute towards some of the costs of their tuition. The current system involves three key aspects:
- a variable charge for tuition fees that can be no higher than £3,290 per year (and represents a subsidised charge), which is paid to universities. In addition to fee income, the government distributes funds to universities and higher education colleges through the Higher Education Funding Council for England (HEFCE) in the form of grants to support teaching, research and innovation. Institutions are free to use this to meet their own priorities.
- a loan system that ensures no student has to pay their tuition fees up front and provides students with some money to support their living costs whilst studying. There are essentially two loans, a loan for fees, which is paid directly to the university or college, and a maintenance loan usually paid directly to the student in three instalments a year. Together these loans have to be re-paid after graduating when earning above £15,000 a year (gross). The loan amount does accrue interest but this is charged at a lower than commercial rate (effectively subsidised by government), and after 25 years any outstanding amount is written off.
- a system of grants and bursaries to support the living costs of those from less privileged backgrounds and to encourage individuals from under-represented groups to participate in higher education (by going some way towards removing the financial barrier). These are the means-tested non-repayable Maintenance Grants or Special Support Grants (up to a maximum of £2,906), and non-repayable university or college bursaries (of at least £329).
How well does this system work?
IES’s research with students and with staff in higher education institutions finds broad support for the current system. In general, people have positive attitudes to higher education. It is seen as investment in career and earnings potential, and many young people (from all backgrounds) and working adults aspire to go to university. The numbers applying to and attending higher education are increasing year-on-year, and the recession is increasing demand for higher education places – to the extent that demand far outstrips supply and more and more students are unplaced.
We find that students appear to be largely resigned to paying tuition fees, at least at current levels, and are not deterred by the personal financial costs of higher education. Our research finds that applicants, higher education students, parents and school and college staff prefer loans for fees (with their delayed repayment conditions) to upfront payment, and so are relatively amenable to the idea of financing tuition through debt. Student Loans for fees therefore appear to be well understood and an established part of the higher education landscape, and awareness and take-up of Student Loans is high. Student Loans are recognised as a competitive method of borrowing relative to alternative commercial sources, and so the message about the affordability of Student Loan repayments does appear to have been received.
In addition, although less well understood and generally underestimated, many students receive some form of financial support from the government, and the grant money appears to be going to those most in need. Those most likely to receive a grant or bursary were from lower socio-economic backgrounds and lone parents. However, very few students know about bursaries and scholarships, even after they have been in HE for several months, and the bursary packages offered by universities tend to be quite complex.
At the same time, universities and colleges appreciate the additional funds they have received through the increased fees charged to students, particularly the newer teaching-led institutions. The additional fee income has enabled institutions to become financially stable, continue with their existing plans and achieve better opportunities for financing; meet rising staff costs and reward teaching; support, refocus and extend existing widening participation and outreach activity; and arguably place greater focus on the student experience. They report that the new student support arrangements introduced in 2006 have settled and bedded down over time, and the additional income has been absorbed into institutional budgets (with a need for a small increase in administrative and welfare support) helping them to continue with largely existing plans and activities.
What is proposed?
So why the need for change? The government is concerned that the UK is still slipping behind its global competitors even with the rapid expansion of higher education, and the financial sustainability of the sector is under threat. The sector is still substantially subsidised by the government (and so ultimately the tax payer) largely through the annual block teaching grant given to universities, and the heavily subsidised loans to students; investment in HE needs to rise but the government feels this cannot and should not come from the public purse.
To this end, the then Labour government commissioned an independent review of HE funding and student finance. The Browne Report was published in October last year (under the new government), and set out recommendations for fees policy and financial support for full and part-time students. In light of these findings and recommendations, the new government is developing its policies for HE. These are likely come into effect in 2012/13 and the government believes it will reduce public spending on HE in keeping with its commitment to reduce the fiscal deficit, whilst maintaining the quality in UK HE, improving the financial stability of the sector, and opening up choice and diversity for students. The plans can be assessed using the same three key aspects: fees and public funding, loans and grants:
- The plans maintain the principle of no student having to pay tuition fees up-front. However, the government now refers to fees as a graduate contribution, and has raised the maximum fee level from £3,290 to either £6,000 a year (the basic threshold) or £9,000 a year (the absolute limit for exceptional circumstances). Institutions can decide how much they wish to charge and whether to charge different levels for different courses. At the same time, the government plans to cut the undergraduate teaching grant by 80 per cent, and remove it entirely for arts, humanities and social sciences subjects.
- The plans also maintain the principle that fees are paid for by a Student Loan that is repayable after graduation when earning, but have raised the repayment threshold, so that graduates begin to start repaying the loan only when their gross income reaches £21,000. They also promise to up-rate this figure yearly in line with earnings. Student loans for living costs will continue, and the amounts available to borrow will increase. However, the government plans to extend the payment period for Student Loans (for fees and/or maintenance), so that outstanding debts are written off after 30 years, and also introduce a real and progressive rate of interest on the loan repayments. There are also suggestions that early repayment of loans will carry some form of penalty charge to ensure that those on high incomes cannot unfairly buy themselves out of the system, and avoid paying interest on their loans.
- Support for students from under-represented groups and less privileged backgrounds will continue with the Maintenance Grants and with a new National Scholarship Programme. Maintenance Grants will increase to £3,250 but the upper eligibility threshold will fall. Details of the National Scholarship Programme have yet to emerge but there are suggestions that this could include paying eligible students’ fees for their final year of study (and institutions funding a first free year); or a free foundation year or professional scholarship to attract and enable students to study courses leading to professional careers that can offer the greatest lifetime benefits to students.
What are the potential impacts?
Our research with higher education students, potential students, graduates and HE staff indicates several challenges for the new system that is proposed:
Costs of HE do not deter applicants but headline levels of debt rather than day-to-day costs have the potential to worry applicants, so will mistaken perceptions about the affordability of HE put potential students off, particularly those from backgrounds already under-represented in HE?
With increasing personal costs to study through a higher contribution (or fee) will HE continue to be seen as investment?
Will changes to loan repayment terms damage acceptance of Student Loans as a key method to fund HE study?
Under the variable fee regime almost all universities charged the maximum rate to protect perceptions of quality, so with a new higher cap will a market for fees develop and how will institutions estimate their market value and place themselves in this new market?
Financial considerations impact upon decisions about where to study and what to study, so if a market for fees develops will this narrow rather than broaden student choices?
We are only now just beginning to see the debt of those emerging from universities under the variable fee regime, so what will new levels of graduating debt look like and what influence will they have on graduates’ employment and life choices?
When the new system is finalised and introduced, it will be critically important for the changes to HE funding and student finance to be monitored and the impacts of these on students, graduates and institutions to be independently evaluated. The questions we pose above provide an initial framework for this research.
For a more detailed discussion and the complete list of relevant IES research please see the full working paper, which will shortly be available from the IES website.
 As set out in The Future of Higher Education, DfES, 2003; and Widening Participation in Higher Education, DfES, 2003
 For details of current levels see the Student Finance section at www.direct.gov.uk
 The numbers applying to go to university reached a peak last year with 688,310 people applying for full-time undergraduate courses in the UK (see UCAS (2010) Provisional end of cycle report 2009/2010). Demand looks set to continue to increase for next year (for 2011 entry) with applicant numbers up on this time last year (at 181, 814 up from 162,706 , see UCAS (2010) ‘2011 applicant figures – November’ Media Release).
 Browne (2010), Securing a Sustainable Future for Higher Education: An Independent Review of Higher Education Funding and Student Finance.
 As set out in The Coalition: Our Programme for Government, Cabinet Office May 2010; the Statement on Higher Education Funding and Student Finance (3 November 2010); various speeches of Vince Cable and David Willetts; and the government grant letter to HEFCE (20 December 2010).
For more information on this work, please contact Emma Pollard at IES.