Everything You Need To Know About Why We Absolutely Should *Not* Scrap Tuition Fees (But Were Afraid To Ask)

Politicians are often playing political football with the matter of university tuition fees and whether they should be 'free' or not. I italicised the word free because, as any thinking person ought to understand, free university education is not free at all - it simply means that the cost of obtaining a degree is transferred from the beneficiary of the degree to the taxpayers. It also means forgetting about all the spillover costs of scrapping tuition fees - and here is not the sort of place where I am going to let you get away with that.

It's actually unbelievable to me that people can argue for 'free' tuition' fees, and not be embarrassed by how careless they've been in ignoring who picks up the cost, the nature of supply and demand, and the numerous unseen costs attached to this policy.

The supply and demand problem of further education began to get worse with the Blair government - his party wanted more people to go to university, and they wanted tuition fees lowered so that it encouraged more people to sign up to higher education. Alas, Blair never bothered to consider whether too many people might go to university at a reduced rate, and that the lower fees might increase demand to an unhealthy or unmanageable level. As for the fact that however much you increase demand you will not increase the universities' capacity for more students than they can take....nope, there wasn't even a mention of that.

At their most expensive, tuition fees are currently at the top level of £9250 - which basically amounts to a loan from the government which is paid back when the graduate earns more than £21,000 per year. If you are coming at this with a socialist agenda, then the current tuition fees system is pretty much the fairest system you could wish for: the government loans to those who need the money to obtain a degree, and it only asks for payment when the post-graduate can afford to repay with a small proportion of their earnings. Anyone who thinks that that is unfair has a pretty peculiar idea of unfairness.

What you have to realise is that nothing comes for free in education. If tuition fees are scrapped, then the cost of obtaining a degree is picked up by the taxpayers. Tax that goes on to subsidise higher education amounts to lots of tax paid by low earners to subsidise people better off than themselves. We know this because we know that two thirds of working people do not have a university degree, and we know that on average obtaining a degree boosts one's life earnings by 60% (at least, that was true last time I checked - but that percentage is going to decline if the market is oversaturated with post graduates).

The only way to think correctly on this matter is to try to ascertain the value of higher education in terms of prices. The value of higher education is this. University fees should amount to exactly what it costs to obtain a degree, and fees (prices) should match demand, whereby the right number of people are getting degrees, and degrees are priced at their true value - a value that measures costs associated with supply and demand. As I said the other day to a proponent of scrapping fees, you cannot even begin to argue for 'free' university education until you have tackled the four most pertinent issues:

1) How would you square the demand-side problem of your policy, given that prices (to the students) will be misaligned with limited supply?

2) How would you square the supply-side problem of your policy, given that even with highly increased demand, 'free' tuition won't magically make all those extra university places available?

3) How would you ensure the equitable allocation of resources (degree courses) in a system where demand heavily outweighs supply, and in a situation where you no longer have price signals to ensure the supply and demand curves intersect?

4) How would you respond to the fact that the UK will suffer a degree inflation due to a surplus of post-graduates?

As expected, she made no attempt to answer any of those questions - she barely even acknowledged that they needed answering. But this was no surprise, because the reality is, answering the questions properly will not lead you to conclude that scrapping tuition fees is a good idea - it will scream the opposite. Scrapping tuition fees would distort the market signals regarding supply of degrees and demand for university places, as it would artificially ramp up demand for places, and bring deadweight losses regarding how people value university education.

You're not even getting off the ground if you're not getting this most basic of points. When fees are too low, people will study even though the cost of going to university is greater than the benefits of a university education. When fees are too high, people will be put off studying, which means there'll be too few university graduates. A few of the low-fee protagonists have argued that a decline in applicants would be evidence that the fees are too high. It would not be, as I'll explain in a moment; it would be evidence of less educational waste, with those no longer doing degrees being the people for whom the cost of going to university is greater than the benefits of a university education.

Of course, the standard argument in favour of subsidised higher education is that higher education confers benefits on others as well as on the main beneficiary, so it must be good for society if it is subsidised. It's a nice idea, but like many nice ideas, the logic is faulty. Deodorant, mouthwash, shampoo and washed clothes each confers benefits on others as well as on the main beneficiary, but no one is arguing for deodorant, mouthwash, shampoo and washing powder to be subsidised.

Here's the key reason why - to take washed clothes as one example - when you wash your clothes you enjoy the benefits of clean and fresh clothes, but so do others too - your not smelling, your looking smarter, and your being a generally more pleasant person to be around are benefits that do not need subsidising, because you'd willingly buy washing powder yourself to ensure such things happen. The same is true of avoiding bad breath and greasy hair - the government doesn't need to subsidise mouthwash and shampoo because it knows you'll willingly pay for them yourself in order to feel fresh and at the same time be socially agreeable.

This is what higher education is like - the benefits and rewards that are obtained (increased employment opportunities, higher earnings, being more highly educated, higher social status, academic prestige, greater knowledge, better conversations, and greater opportunities) certainly extend beyond the person doing the degree, but they are benefits and rewards that people feel are worth having without the need for a subsidy. That's why a heavy education subsidy only encourages inefficient numbers of students, and why a system that charges people the cost of their degree won't discourage people with real promise and potential from entering higher education.

For those reasons - unusual as it is - the government has its policy just about spot on with tuition fees. It loans to those who need it, and it only asks for payment when the post-graduate can afford to repay with a small proportion of their earnings, which means smart people from poorer backgrounds need not be put off from further education. To have no tuition fees would be to spread the cost of people's higher education amongst the rest of the taxpayers - and quite why anyone thinks they should foot the bill is beyond me.

Another good thing about the government's policy is that it also avoids too much of a market mechanism in higher education, which, if too money-centred can be a bad thing. Consider why. Suppose Oxford and Cambridge had hiked up admission fees to attract the elite. Such a policy goes against the thing they should value most - academic credentials. If you are an employer looking to employ an Oxford graduate, who would you prefer; one who got in on scholastic merit, or one who got in because of a privileged financial background? The value of attending Oxford depends largely on the university's reputation, which is built primarily on prior academic excellence of former students. By having applicant quality as the measure of admission, the average student quality can be increased, which then further increases the prestige, which then increases the allure for high-quality future applicants.

A system that neatly balances the admission quantity between talented young people that can pay (and do), and talented people that can't pay and are helped along the way, is a system that is just about right. It is inevitably true that being from a privileged high-achieving background does confer advantages on young people that young people from working class backgrounds do not enjoy. This upsets lots of people - but it should not. Privilege mostly comes (either directly or indirectly) from high achievement. Therefore if you want to argue that that is a bad thing, you are arguing that a world in which achievement engenders advantage is a bad thing, which amounts to devaluing merit-based advantages - and to do that is to make a mockery of applying skills and working hard in general.

Are fees actually too low, not too high?

Instead of worrying too much about rising tuition fees, what should be considered is that putting up tuition fees might actually be a good thing for the country overall. There's no doubt that higher education brings about huge financial benefits to the county*, but there's also no doubt that having too many graduates devalues graduation in the labour market, and that in a state of diminishing returns the financial benefits would no longer bring about such efficiency.

The irony is, instead of worrying too much about rising tuition fees, what should be considered is that putting up tuition fees, or demoting some degrees to college level qualifications, might actually be a good thing for the country overall. We know that currently around 20% of post-graduates are doing a job that doesn't require a degree (this figure might actually be higher) - which is indication itself that there is a surfeit of degrees in a labour market with too few degree-level jobs.

There is another very good reason why value is so important - if degrees are valued commensurate with the landscape of both supply and demand, and of the labour market, there is a better chance of the number of graduate-level jobs matching the number of graduates. For example, the future job market is going to see many current graduate-level jobs replaced by computer technology, but it will also see an increase in other graduate-level jobs that look likely to grow in number. Only a proper market-based further education system can be optimally responsive to a rapidly changing labour market environment, particularly with the proliferation of service-industry jobs.

Prices are the market's method of signalling how much of a good is available against the level of demand for that good. An expensive good (like a degree) costs resources (time and money) but those costs signal that those who value degrees most will get them. The abolition of tuition fees would mean that universities have no way of signalling the true scarcity and value of university places to prospective students, particularly as through a taxpayer-funded system high and low demand opportunities are going to be similar if not equal in price. Students, like people in general, make much more informed decisions in life when signals accurately match supply and demand.

The supply-side problem of inflated degrees causes another issue too. According to Merryn Somerset Webb at MoneyWeek - one of the go to places for statistical updates - currently around 45% of student loans end up being written off, where the tipping point at which the whole thing starts costing rather than saving money is 48%. This problem is in part due to graduates earning less than expected, or sometimes nothing at all, but also due to the tax avoidance incentives woven into the system, such as salary sacrifice.

“With clever planning, an employee can use salary sacrifice to reduce their income below certain thresholds and therefore make further savings. Take student loans, for example; many students leave university with high hopes of landing a top job but can find themselves undone, with low pay and laden with debt. Repayment of student loans is 9% of income earned above £17,335 for those taking out student loans before September 2012, and £21,000 for those taking a loan out after 1 September 2012. This can often leave many university leavers with a lot less take-home pay than they need. Taking into account Income Tax and National Insurance, a graduate will take home just 59p in the £1 for part of their income earned above the repayment thresholds. This would further reduce to 49p in the £1 for income earned above the basic rate tax threshold and a quite frightening 32p in the £1 for each pound of income earned between £50,000 and £60,000 if the graduate has two children and is in receipt of Child Benefit payments.”

It's not exactly rocket science, is it? Suppose our graduate earns £30,000, and has a choice of putting money into her pension either via salary sacrifice or out of her net salary (whereby the tax is claimed back). If she does it using salary sacrifice, her official gross salary is not £30,000, it is £27,000. That cuts her National Insurance bill and her income tax bill – but most essentially, it also cuts her loan repayments from £810 to £540, where the resultant outcome is a take home pay of £20,907 instead of £20,277. That's all very nice for our graduate, but it's not such good news for taxpayers as a whole. It might well be time to ditch the salary sacrifice scheme.

The thing is, if the university supply and demand curves intersect - that is, if the demand for degrees and the supply of degrees are in market equilibrium, then you can be confident that the price at which this happening is an accurate one. However, once the system becomes skewed whereby a loan is involved yet nearly half the graduates never pay back even a penny of that loan, the alarm bells ought to start ringing, because it's obvious that this is down to there not being enough post-grads doing degree-level jobs. This is the market’s way of trying to tell us that there are currently too many people doing degrees.

Because the taxpayer picks up the cost of unpaid student loans, it means the surfeit of university degrees in this country end up being subsidised by the general public - many of which are low earners. Consequently, this means a great many of them are subsidising people that are doing degrees and never earning enough to pay them back, while the rest of the post-grads, the people that do pay them back, are effectively being taxed twice on the same degree. Only a very narrow thinker could believe that this is a system that's working well.  

I am fairly certain that even Jorbyn Corbyn is not stupid enough to think that if tuition fees were scrapped, there would magically be enough university capacity for everyone who wanted to take him up on this offer of a taxpayer funded free lunch. The only effective way to align number of degrees with demand for degrees is to allocate them with an efficient price system, because there are not an unlimited number of degrees nor are there a limited number of degree level jobs. Subsidising further education can no more eliminate degree inflation than adding more dollars to Zimbabwe’s hyperinflated economy can ease its monetary crisis.

What's the solution for a better model then? Personally I doubt any system would be without problems, because although it's true that market forces are the vital incentive-drivers missing from further education, it is quite difficult to forecast the value of a degree in terms of future earnings, overall value to the student, and by extension society. A philosophy degree is a valuable indicator for a prospective employer, so is an economics degree, but which is more likely to be a better return on the investment? How would that compare to, say, a geography degree or a degree in global development? You'd need a strong and reliable metric for this determiner, and that could be economically intractable.

Given that most students have no capital behind them, so no chance of paying their fees without a loan, my hunch is that the best system would be a system vaguely resembling what we have now, except that degrees would be priced in accordance with supply, demand and value; and universities, possibly backed by finance companies, would pick up the cost of the degree themselves, under a system in which students sign over a proportion of their future income in order to receive an education. This would provide greater incentives for universities to align degrees to their value, and it would increase competition in higher education amongst competing universities, because currently the state ensures that the universities don't have to worry too much about the students' ability to repay, creating moral hazard.

Universities that invest in the future earnings of their graduates would align the incentives of buyer and seller, increasing the chances of society having the right kinds of degree, the right number of degrees, and the fewest number of graduates defaulting on any part of their loan. The interests of the student and the university have to be aligned, where they both invest in the future of the student's education for their mutual benefit, eradicating as many perverse incentives as possible, and pricing degrees accordingly, and also in the process aligning the value of a degree with its wider value in society.

Are universities bastions of unfair discrimination?
I remember when the then Prime Minister David Cameron launched a scathing attack on the universities of Oxford and Cambridge for failing to recruit more BME (black minority ethnic) students, saying that racism in the UK’s leading institutions “should shame our nation”.

He was right that it's a shame that there are not more BME students in our leading universities, but he was quite wrong to lay the blame at the door of Oxford and Cambridge universities. The so-called fact of Oxford and Cambridge being under-represented by BME students is not to do with institutional racism at our top universities, it is to do with the fact that prospective BME candidates are far outnumbered by white British candidates, which has a lot of complex causes - but none of them are the fault of Oxford or Cambridge.

It is quite easy to be outraged at statistics if you don't understand them, and clearly David Cameron just didn't get that there are simply not enough BME people in the country to fulfil his wish. A quick Google search reveals to me that if a top university accepted students in a way that precisely represented the UK demographic, then for every 100 people, there would be 87 whites, 7 Asians, 3 blacks and 3 others. Even on strict egalitarian grounds it is very difficult to justify a selection policy that doesn't see BME people outnumbered by whites.

But, of course, that's only part of the flaw in David Cameron's reasoning - the other thing wrong with his misunderstanding of statistics is that Oxford and Cambridge are not looking for a representation in terms of ethnicity or skin colour, they are looking for representation in terms of academic ability. That is to say, Cambridge and Oxford universities are the seat of academic excellence in the UK - and if the statistics show that only a small proportion of BME people get into Oxford or Cambridge, and a large majority of students are white, that does not show any institutional unfairness on the part of Oxford or Cambridge. It merely shows that if Oxford and Cambridge are trying to attract the most academically gifted students in the country, and if by far the greatest proportion of the most academically gifted students in the country are not in the BME demographic, then Cambridge and Oxford's admission policy is completely fair.

There is certainly a conversation to be had about all the ways that BME and under-privileged pupils in schools are disadvantaged or coming up against barriers to fulfilling their potential, but that's not an indictment against our two best universities - and David Cameron should have known better - particularly as it's very likely the case that this phony 'outrage' is really just an attempt to court popularity amongst the BME demographic

More bad reasoning

Another piece of faulty logic doing the rounds in recent years has been the issue of caps. There used to be a cap to ensure universities had a limited number of students achieving grades AAB or higher at A-level. When the cap was lifted a few years ago, some higher education commentators were concerned that this would lead to the creation of an elite English “Ivy League”, reflective of the American higher education systems, and possibly even alienating students from poorer backgrounds less likely to achieve high grades.

Their fears have come to pass, as currently over half of students achieving AAB or better at A Level are concentrated in just twelve universities (they are: Manchester, Durham, Oxford, Cambridge, Nottingham, Leeds, Exeter, Bristol, Warwick, Birmingham, Sheffield and Southampton.)

However, even though there is a high concentration of high grade students attending just twelve universities, there is absolutely no reason why this should be a problem - in fact, it is quite the opposite: it is a blessing in disguise, because it gives exhibition to the healthiness of competition and the value of incentivisation to do well and go to the best universities.

By equal measure, a competitive higher education market incentivises universities to pull out all the stops to attract the brightest and best students and be as high up as possible in the league table of results nationwide. In a marketplace with healthy competition and demonstrable incentives to strive for high standards you would expect to see cluster groups of high achievers, just as you see in sport, in retail and in entertainment. But competition doesn't just make the best better, it raises (or has the potential to raise) the standard of everyone, because it should incentivise lower performers to up their game, either by improving standards, by innovating to capture an unfilled niche, or in some cases by trying something different altogether.

The other peculiar thing many people tell us is that if a higher education marketplace is too openly competitive it will work against people who are bright but from disadvantaged backgrounds. This is an absurdly counterfactual objection to have, because it will actually have the opposite effect. An education marketplace that is too money-centred will be a bad thing because, in terms of performance and results, selection against bright disadvantaged students will disadvantage the university.

Consider why. Suppose Oxford and Cambridge had hiked up admission fees to attract the elite. Such a policy goes against the thing they should value most - academic credentials. If you are an employer looking to employ an Oxford graduate, who would you prefer; one who got in on scholastic merit, or one who got in because of a privileged financial background? The value of attending Oxford depends largely on the university's reputation, which is built primarily on prior academic excellence of former students.

By having applicant quality as the measure of admission, the average student quality can be increased, which then further increases the prestige, which then increases the allure for high-quality future applicants. A system that neatly balances the admission quantity between talented young people that can pay (and do), and talented people that can't pay and are helped along the way, is a system that is just about right.

By capping or scrapping the fees universities can charge, politicians are depriving these great institutions of resources and stifling the competitive component out of the market, which is ultimately worse for students, universities, prospective employers and the everyday taxpayer. A reliable price system is the only way to show who benefits most from obtaining degrees and who benefits most from providing them. I don't think I could put it any more unambiguously and compellingly than that.