Student finance: time for a rethink?

On 18th December,  the Interim Report into a Review of Higher Education Funding and Student Finance Arrangements in Wales  was published by the Welsh  Government. This extremely comprehensive document has two objectives. “First, it provides a summary of the evidence received to date. It is a summary and it provides links to a number of other documents that provide fuller information. Second, through this summary it aims to prompt further discussion and debate as to how the system of higher education funding should develop.” However, this document contains no policy recommendations which will have to wait until the final report due to be published in September 2016. Nevertheless Professor Diamond the review chairman hinted that the majority view of respondents was that the status quo was not an option.

A few days earlier, in presenting its annual budget the government announced that the annual grant to the Higher Education Funding Council for Wales (HEFCW) was to be cut by £40 million though £20 million of this will go to fee support. Nevertheless the remaining budget is used, amongst other things, for supporting research, widening access and for helping vulnerable students. The Council will have some difficult decisions to make when it meets in the new year.

What follows is based on the evidence which I was invited to present to the Diamond Review.

The move to a maximum tuition fee level of £9000 per annum recommended by the UK government following the Browne Review in England has increased the flow of resources going to universities in Wales. In his recent budget, Mr. George Osborne announced that from 2017-18, universities that demonstrate excellence- the Russell Group comes to mind- will be allowed to increase their fees by the rate of inflation. Together with the raising of the cap on university places in England, this is likely to further handicap the majority of Welsh universities in their quest to expand numbers.

The current Assembly policy on student finance has many features to commend it.  For example, The Assembly Learning Grant (ALG) for disadvantaged students is, at a full amount of just over £5000 a year ,  considerably more generous than in other parts of the UK and this is to be applauded. (In England the full grant was less than £3500 and following the recent budget is to be replaced by a loan). It is encouraging to note that, compared to a decade ago, these students in Wales are 65% more likely to apply for university, though in England the comparable figure is even greater at 95%.

Unlike England, Wales has also retained the Education Maintenance Allowance (EMA) designed to encourage students from poorer backgrounds to stay on in education after the age of 16. This is important as once they achieve the necessary qualifications, these students are just as likely to apply for university as other students.

However, The Tuition Fee Grant (TFG), which pays all universities with Welsh domiciled students the difference between their fee level and £3685, is in my view extremely poor value for money being mainly a middle- and upper-class subsidy. It is effectively paying students and their families for pursuing a course of action which  they would have followed any way. Students from these social backgrounds are in a majority in every university in Wales, the proportion varying from a value of about 54% to about 78% (Sunday Times University Guide 2015)

I estimate that the cost of this subsidy over the course of this Assembly term is about £1billion not including the cost of subsequently supporting students who will be in their first and second years during the last year of the Assembly term. It also excludes EU students who are also entitled to the full tuition fee grant.

There is no evidence that this policy has encouraged more students to apply to university though it may have prevented a decline in applications. In terms of application rates, Welsh numbers remained at around 29% from 2010 through 2013 with a slight in increase in 2014. Acceptances from Wales were roughly constant between 2006 and 2014 whereas in England, which did not have a tuition fee subsidy policy, acceptances increased by nearly 30%. It is true that in both England and Wales the 18-year-old cohort has fallen by between 5% and7% so a constant acceptance level represents some progress. (Data from UCAS 2014 End of Cycle Report.) Universities in Wales are concerned that this policy may encourage Welsh students to study outside Wales, a feature which may not be helpful in recruitment especially given the increased competition for students mentioned earlier.

The TFG is in my view a bad idea for all students not just those who study outside Wales so I would do away with it entirely. If it was desired to encourage Welsh students to study here, a non-mean-tested grant could be introduced for those staying here which would have the additional advantage of not having to be extended to EU students. Cash in hand might also prove more attractive than a deferment way into the future of the need to repay tuition fee loans.

Besides abolishing the TFG in its entirety, I also propose removing the provision on graduation for partial cancellation of maintenance loans up to a value of £1500, a feature which I believe is unique to Wales. This only benefits high graduate earners who would otherwise pay off their student loans in their entirety. For those who do not achieve earn sufficiently to do this are forgiven outstanding loans after 30 years anyway. Incidentally, the idea for a loan write off after a specified period, a feature which the Institute for Fiscal Studies found to be surprisingly progressive, was first proposed by the Rees Report -Independent Investigation Group on Student Hardship and Funding in Wales- published in 2001.

The student finance system in Wales and in the UK in general, in particular the extent and nature of means testing is no longer fit for purpose and should be reformed. It contains many anomalies and inconsistencies and is more costly than it need be. For example, in Wales, it is possible for a student from a family with a household income of say £100,000 and financial assets of say £1million, given shrewd financial planning, to receive the same package of support as a student from a one parent family on benefits.

The current means testing of access to funding is fundamentally flawed in two main respects: it is too generous to students from high-income families and the definition of household income used is out of date.

A curious feature of the present system is that while the ALG is means-tested away to nothing, this is not true of the maintenance loan (the tuition fee loan is not means-tested at all), which is only 25% means-tested. In certain conditions, loans can effectively become grants, so there seems no longer no logical reason to treat them differently.

Consideration could be given to increasing the contribution that parents and partners make to their children’s/partner’s higher education, a well established principle in North America.  Parents are now up to £27,000 better off than they would have been had the previous system of tuition fees means-tested on parents and payable up front been in place. I propose therefore that maintenance loans are fully means-tested so that high earning parents would need to help out their children with living expenses.

The household income measure used in the means test itself is flawed in that only taxable income is counted and is not a good indicator of ability to pay. It is possible to arrange one’s affairs so that the earned income element in household income can be reduced by making pensions contributions in any one tax year up to 100% of the value of the income. I therefore suggest that, for purposes of assessing household income in the student finance system, disallowing pension contributions as a deduction.

Regarding investment income, it is possible to shelter significant amounts from the tax system by investing in tax-free products. Examples include returns from Individual Savings Accounts, Enterprise Investment Schemes, Gambling winnings, Premium Bond Prizes, 5% annually withdrawn from Single Premium Life Assurance Bonds and tax-free capital gains from equities up to £11,000 a year per individual.

My suggestion is to ask for details of taxable investment income as before but for tax-free income to ask parents for a statement of the value of the corresponding financial assets and then apply a figure of about 3% to 5% to that value to come up with a figure of notional income. After all, means-testing on capital is a feature of social security and access to funds to support residential care, so there is no reason why it cannot be introduced for student support.