The myth of over-education

The fear that we are over-educating our population is not a new concept.

Back in 1963, when only 1 in every 100 people went to university full-time, policymakers were already convinced that any expansion of the sector would result in an over-supply of graduates – many of whom were incapable of benefiting from higher education – and the inevitable falling wage premium (Barr, 2014).

Fast forward 50 years, with nearly 40% of young people enrolling in university (BIS, 2014), and here we are, still having the same argument. A report issued today by the CIPD argues that the number of graduates has now “significantly outstripped” the creation of high-skilled jobs, and that over-qualification at “saturation point”. This has led to calls for the government to encourage alternatives to university, and for our young people to think twice about going to university.

But do we really have too many graduates?

Whilst there are many ways to answer this question, simple economics can help us here.

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Economics of HE Budget Response

There were a surprising number of announcements relating to higher education in George Osborne’s budget this week. One of the most controversial was the announcement that university maintenance grants for lower-income students in England and Wales are to be scrapped from September 2016 and replaced with loans. The £9,000 annual fees that universities charge students will also be allowed to increase by inflation for those universities “offering high teaching quality”.

These moves could harm access to university and are a concern on the grounds of equity and efficiency. While poor students will have slightly more money in their pockets when they get to university, after the chancellor raised the amount of maintenance loan they can borrow, they will graduate with more debt.

Grants currently stand at a maximum of £3,387 per year for students with parental incomes of £25,000 or less. This was on top of £4,047 in maintenance loans, so their full package amounted to £7,434. These students will now be able to borrow £8,200 in maintenance loan support if they live outside London, meaning on a cash basis they are £766 better off. However, they will graduate with an additional £4,153 in debt. This means that the poorest students will now graduate with the biggest debts.

It is, at first glance, hard to follow the chancellor’s logic here. It is widely known that somewhere around 45p in every £1 the government lends to students will be subsidised by the government, since students themselves don’t repay all of their loans or cover the full cost of borrowing to government. So, extending loans to poor students may not save the exchequer much. And, under the fair assumption that lifetime earnings are correlated with parental household income, the proportion of these loans that will be written off is likely to be higher than average.

However, the chancellor may have other intentions here. While increasing student loans will impact debt, they have a smaller impact on the deficit than student grants – which are pure expenditure that will not be paid back. So removing grants will reduce the deficit, something the chancellor is always keen to do – even via what amounts to an accounting trick.

The potential impact of these changes on students is an under-researched area. However, there is a small amount of evidence that can help us to understand the likely consequences. Myself and colleagues studied the impact of the previous move to abolish grants, by Tony Blair’s Labour government in 1999. Throughout the 1990s, grants were slowly phased out, then finally abolished in 1999 (alongside the introduction of the first tuition fees), only to be re-introduced in 2004.

Our analysis shows that the re-introduction of grants improved participation of students from low-income families by 3.95 percentage points. This strongly suggests that abolishing grants will harm access. Similar studies from the US have drawn the same conclusions.

But under the chancellor’s new regime, students will be able to replace the loss in grants with further borrowing. Such a change is, again, an under-researched area, though there is asomewhat relevant 2001 study from the US. In this study, the entire loan portion of the student aid package (which consisted of loans, grants and campus jobs) for low-income students was replaced with grants at one north-eastern university after reforms in 1998.

The authors found no significant effect on overall participation as a result of the reforms. However, they did find some effect for minority students, suggesting different groups of students may see grants and loans very differently and may not have the response the chancellor is hoping for. It’s also worth noting this is a study from a single institution with students facing very different financial conditions than those here in the UK.

Osborne’s move could have worrying implications for equity and efficiency. While poor students may not face any increase in liquidity constraints – since they will have more cash in hand than previously – they will now graduate with more debt than those from better-off backgrounds. And debt-averse students – who are more likely to be found among the poorest groups – may be put off from applying altogether. As well as being inequitable, this could also be inefficient. The expansion of higher education over the past 30 years has helped productivity, and we need to ensure that talented students from all backgrounds participate.

The other major announcement affecting higher education was that some institutions will now be able to increase their tuition fees according to inflation. This will come as a welcome announcement for universities, many of who have been calling for this for years. After all, the 2012 increase in fee caps to £9,000 was meant to give universities more control over their resources, but the government still maintains full control over the amount of fees they can charge through the cap.

But the announcement came with strings – only those institutions that do well in the recently proposed Teaching Excellence Framework, which will monitor and rank universities for great teaching, will be allowed to apply inflationary increases to their fees from 2017. While the £9,000 fee cap has been allowed to erode with inflation since 2012, it is worth noting that inflation is rather low at the moment, suggesting that the new policy will not have a huge impact on university finances.

More importantly, the government can’t yet afford to allow universities to make large increases to fees. Again, this is because of the high cost to the state of providing loans to students who may not pay them back. Any fee increase would come at a cost to the government.

But there are ways round this. The government also intends to: “review the discount rate applied to student loans and other transactions to bring it into line with the government’s long-term cost of borrowing”. The discount rate is a way of accounting for the fact that money paid in the future is less valuable to the government than money paid now; £1 today is worth more than £1 in the future. Student loan repayments come in slowly, over decades, so the government has to decide how much to value – or discount – these future payments.

If the government decide to reduce the discount rate, this means valuing future loan repayments more highly; hence future student loan repayments will automatically be worth more to the government than they were previously. So the estimated loan subsidy (and the amount of student loans that will not be repaid, also known as the “RAB charge”) will be reduced without any actual increase in repayments.

The government can also make loan repayment terms more punitive for students. Osborne also announced that the government is going to consult on freezing the repayment threshold for how much graduates have to be earning before they start paying back – currently set at £21,000. Such a move could largely balance out the cost of allowing fees to rise with inflation, since, as earnings go up, more graduates would find themselves over the threshold for repayment. This may be the start of a move toward even more punishing loan repayment terms as the government attempts to further reduce taxpayer expenditure on higher education and move towards a market-based, consumer-led sector.

Is lowering the fees cap the right policy?

By Nicholas Barr (London School of Economics and Political Science)

Reforms introduced by the Blair government in 2006 provided a progressive strategy for financing higher education, a strategy on which further reforms in 2012 failed to build (Barr 2012). In response, the Labour Manifesto (2015) proposes a reduction in the cap on tuition fees from £9,000 to £6,000, a policy supported by the SNP Manifesto (2015). This note provides a toolkit for assessing that policy. Section 1 sets out the problems with current arrangements and section 2 policies to improve the system.



This note argues that:

  • Central objectives for higher education are quality (higher), access (wider) and size (large enough to accommodate all qualified applicants);
  • In pursuit of those objectives, higher education finance in England is based on the right strategy but with the wrong parameters;
  • There is a good case for some additional taxpayer support for teaching, but the proposal to lower the fees cap is the wrong method at the wrong time.

CURRENT PROBLEMS. There are two major economic distortions of higher-education finance in England:

  • Taxpayer support for teaching in the arts, humanities and social sciences is inadequate in that it ignores their public benefits.
  • The level of income at which graduates start to repay their student loans is too high. The resulting high fiscal cost of loans crowds out desirable spending in other parts of the education system, with adverse effects on efficiency and equity.

In the presence of the second problem, it is an analytical error to consider the first in isolation.

SOLUTIONS. If fiscal stringency allows only one policy, it should be to reduce the fiscal cost of loans, freeing resources which make it easier:

  • To expand the loan system, for example, to increase the maintenance loan and to extend loans to postgraduates and part-time students, to other parts of tertiary education, and perhaps also to apprenticeships.
  • To restore pro-access interventions earlier in the system, for example Education Maintenance Allowances and AimHigher, which were wrongly abolished in 2012.

Additional taxpayer support for teaching is desirable. However

  • It should be in addition to the current fees cap, not a substitute; and
  • It should not come first.


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There’s more to higher education funding than the RAB charge

By Jack Britton (Institute for Fiscal Studies) and Claire Crawford (University of Warwick, Institute for Fiscal Studies)

Higher education funding has been a hotly-debated topic in recent times, with the RAB charge – the government subsidy inherent in the student loan system – a prominent focus of these debates. On the back of new research published today, researchers at the Institute for Fiscal Studies argue that this focus comes at the expense of a wider discussion around how much the government should subsidise the higher education system as a whole, and how best to deliver this. Continue reading →

Labour’s university fees reduction would eventually pay for itself

By Peter Scott (Institute of Education)

In the 2010 election, higher education acquired a surprising prominence, notoriety even, as a result of the Liberal Democrats’ position on student fees. What a U-turn that was – from a promise to abolish fees entirely to acquiescence in a decision to triple them from £3,000 to £9,000.

This time round it looks unlikely there will be the same excitement. In only a small number of seats could the student vote could be decisive. In the last election the Liberal Democrats captured 44% of the (full-time) student vote. According to polling last year, this has plummeted to a miserable 13%.

Although Labour has gained most from the slump in the Lib Dem student vote, no more than 12 seats – six Conservative marginals and six Liberal Democrat seats (not including Nick Clegg’s Sheffield Hallam constituency) – are at risk. And student registration and turnout will be the key. It doesn’t add up to an electoral earthquake even in a tight election. The majority of staff and students will, once again, tilt to the left – but probably to the Greens and, in Scotland, to the SNP as much as to Labour – and without much hope that the tide of marketisation will, or can, be reversed. Continue reading →