Category: Fees and Funding

  • OfS insight on institutional closure lacks a firm statutory foundation

    OfS insight on institutional closure lacks a firm statutory foundation

    The Office for Students’ (OfS) insight briefing “Protecting the interests of students when universities and colleges close” is as much a timely reminder of where the law falls short when providers are at risk of closure as it is a briefing on how to protect the student interest under the current policy framework.

    As we set out in our Connect more report which explored, among other things, the legal framework for institutional insolvency, market exit and/or merger, the role of OfS in any institution at risk situation is already unhelpfully ambiguous. Its concern may be the student interest, but it is not empowered to prevent institutional closure (even if, as is often likely to be the case, the student interest would be best served by completing the course they registered for at the institution they enrolled in) – or even to impose order on a disorderly market exit.

    In the absence of express powers or an insolvency or special administration regime for higher education, OfS’ role becomes one of a point person, facilitating conversations with other agencies and stakeholders, but with no powers itself to prevent a disorderly closure. The tone of the briefing is collaborative and collegiate but, in a world where students are no better protected than any other unsecured creditor if a provider becomes insolvent, it’s doubtful that, under the law as it currently stands, the interests of students will be protected to the degree to which OfS desires.

    While OfS may be primarily concerned with protecting students’ interests, the trustees of those providers that are constituted as charities have a statutory duty to act in the best interests of the charity and to pursue their charity’s purposes. This duty will, of course, encompass the needs of present students but will also encompass past students, future students, research activities and much more besides. While no one would disagree with the general sentiment that “throughout the process [of institutional closure] the interests of students, and their options for continued study, must be kept in mind” – and the briefing does offer lots of useful ideas for how to ensure sufficient attention is given to the many types of students who will be affected – the elevation of student interest to a pre-eminent concern is not what the law generally, nor what OfS’ statutory duties currently require.

    University executive teams and boards may wish, therefore, to read OfS guidance in light of these realities, and be aware of the limits of what is realistically possible or likely to occur in giving consideration to the sort of scenario planning and preparation OfS advocates in the briefing.

    A herd of elephants

    OfS’ recommendations about the need to have suitably durable and maintained student records and to have entered into binding contracts with validating and subcontracting partners that contain clauses that deal realistically with the end of the relationship and contain adequate data sharing agreements clauses are all well made.

    But once things actually start to get tricky in real life there is a level of reliance on transparency, for example, in sharing information both with OfS but also with other organisations such as funding or regulatory bodies, or government departments, or even other institutions who might be prevailed upon to welcome displaced students. In the absence of a systematised notification process, any ambiguity about whose role it is to liaise with the various potentially affected stakeholders or the timing of any such communication has high potential to create problems. There are obvious issues raised by disclosing or revealing another institution’s “at risk” status, some of which may have the effect of accelerating the very process everyone is seeking to avoid.

    If OfS considers a registered institution is at risk of closure, it can impose a student protection direction under condition C4 of the conditions of registration. The briefing provides a helpful reminder of what a student protection direction might include and encourages regular thought about these issues to avoid the need for a provider to “improvise at speed and under stress if an institutional closure becomes possible.” That sounds very laudable at first glance, but it confuses the regulatory obligation with the real-world outcome. A provider at risk of closure may well come under pressure from OfS to produce a market exit plan and to map courses at a time when university teams have the least bandwidth to undertake such tasks. In any case, it is highly doubtful whether an insolvency practitioner would be bound by such planning in the event that a provider goes into an insolvency process.

    In scenario planning, OfS moots the idea that higher education providers might consider setting up “agreements in principle” with other institutions “to take on relevant students if one or the other closes” or even “possibly multiple agreements, for different courses and subjects.” It is surprising not to see competition law mentioned in this context. The higher education sector contains a broad range of institution types, with varied teaching and delivery methods, attracting students with different needs and expectations as regards learning and study.

    This means that in practice the providers that pair up to take on one another’s students in the event of institutional failure will need to be similar types of provider – precisely those that are in competition for students in the first place. As Kate Newman has argued in an article on the impact of competition law on higher education collaboration, it would be helpful if OfS and the Competition and Markets Authority could jointly consider these kinds of circumstances for the sector as a whole rather than providers having to navigate this complex legal territory on an individual basis.

    We’re also concerned that any such “agreement in principle” will not be legally binding and will have been reached at a single point in time, when conditions may be quite different to the time when the institutions seek to rely on them. There is a very real risk that unless these agreements are refreshed annually (a time consuming and potentially collusive activity) they will turn out to be like the original student protection plans in being not terribly helpful.

    A sector like no other

    In issuing its briefing OfS argues that “this sort of risk and contingency planning is normal in other regulated sectors,” citing the examples of customer supply contingency plans for energy suppliers and the need for banks to have recovery and resolution plans. However, both of these sectors have highly developed insolvency regimes. Drafting recovery and resolution plans is much easier to achieve when there is a viable insolvency process in place. Both the energy and banking sectors have special administration processes in place and there has been much recent press coverage on the water sector special administration process, in light of Thames Water’s difficulties.

    OfS encourages institutions to undertake extensive course mapping. However, given the scale of the financial pressures facing the sector, it’s doubtful how valuable such course mapping is likely to be where potential recipient institutions are perhaps equally likely to be at risk of closure. To be fair to OfS, the briefing stresses that mapping is particularly relevant for those institutions that offer specialist provision.

    And here, of course, lies the essential problem. As OfS states: “We have drawn on our experience of managing two relevant cases at small and specialist higher education providers during the past year, and of instances where there was a serious risk of a closure which did not materialise.” The counterfactual – closure of a large and generalist provider which does materialise – remains the biggest elephant in the room. While OfS’ openness in sharing its insights is to be welcomed, it does nothing to diminish the need for urgent structural change.

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  • Government economic policy depends on a healthily diverse higher education ecosystem

    Government economic policy depends on a healthily diverse higher education ecosystem

    At GuildHE, we represent over 60 institutions that do not fit the traditional, large, generalist, research-intensive mould. These institutions are deeply focused on industrial readiness, employability, specialist skills and regional growth.

    They deliver vital skills in geographical areas and sectors where the UK faces acute shortages, and directly support the government’s own missions to grow, increase opportunity, develop a greener future, reduce crime levels and build a better NHS. Whether this is achieved through healthcare, the built environment, teaching, policing, agricultural innovations, law or the creative economy, the future talent pipeline to address these missions depends, in large part, on the success of these providers. However, the current funding landscape does little to protect and support them.

    The image of the large generalist, research-intensive traditional higher education institution is the model on which the funding and regulatory system in the UK is based. This model has become the DNA of our systems, which rely on assumptions about the sector as a whole: its strategic missions, delivery mechanisms and capacity. These assumptions naturally impact the incentives and levers that are built into policy frameworks.

    Policies often fail to recognise those that fall outside that image, so that smaller, specialist, and non-traditional institutions face increasing threats to their viability. Sector consolidation and investment in the historically-established HE model, as seen in other settings across the world such as Australia and the US, could undermine our global reputation, agility and responsiveness to diverse students and industries.

    Challenging these systems, and the methodologies on which they are built, will require the government to embrace innovative models of practice across education, skills and research, even if it comes with some associated risk. Indeed, it will require a brave examination of the effectiveness of the very regulatory and funding systems which are encouraging a level of homogenisation across the sector that could spell its own doom.

    To that end, we propose an approach to spending in the next period that focuses on reforms to encourage investment and rethinking the system to make it work smarter.

    Invest in the talent pipeline and protect student choice

    As part of this government’s vision to expand opportunity, we have seen the beginnings of multiple new strategies and administrative initiatives, including proposals for a new Industrial Strategy, a Get Britain Working strategy, a new ten-year plan for the NHS, reform of higher education and the introduction of Skills England. These new arrivals aim to improve economic growth, encourage efficiency in public services, produce a future skills pipeline and build an investment environment for UK business.

    Higher education drives the transformative forces required to raise levels of productivity and improve economic growth. Institutions do this by stimulating the higher-level skills needed in industry, providing lifelong opportunities to retrain and upskill, and expanding opportunities for all to do so. They also do it by cultivating ideas and new knowledge; a cornerstone of productivity and growth.

    Alongside these contributions, we need to protect student choice by preserving a variety of institutional types and locations across the country. Doing so is vital to ensuring the widest range of students can access the transformative power of higher education; a power that yields both individual improvements in life chances and direct improvements to employability, our public services and our economy. Furthermore, a system that boasts a diverse range of institutions and provision types is a healthy one that can deliver to local economies and communities across the country and thereby demonstrate ways in which higher education institutions are vital to those beyond us.

    Balancing government growth and skills priorities with student choice is not mutually exclusive. Models of higher education that prioritise industry practice, employer needs, innovation impacts and workplace experience can achieve these priorities. The capability to develop high-level specialist skills dynamically in a way which also builds the social resilience required to respond effectively to new, advancing technologies is quickly becoming a standard requirement of our graduates. We need reformed spending to achieve it.

    Do things differently, get different results

    Minister of State for Skills Jacqui Smith has said that the government is ready to review the education system and develop a way forward that “challenges the status quo.” To genuinely fulfil this ambition, we need fundamental change to the foundational regulatory and funding systems so that diversity in terms of institution, student, and pedagogical approach can survive into the future. If this government is serious about its ambitions to grow and future-proof education and skills, the following reforms are needed.

    Reform teaching funding to support priorities

    Government should establish funding streams for specific outreach programmes in priority subject areas like creative arts, teaching, healthcare, construction and agriculture. Doing so would acknowledge failures in the prevailing market ideology that implied industrial need for qualified graduates would shape applications into relevant programmes. Identified subject areas required by both our industrial sectors and broader society could provide a clearer rationale for funding allocations than student numbers across current Office for Students bandings.

    The Strategic Priorities Grant for 2024–25 has been used to support “work on high-cost subjects, student mental health, degree apprenticeships, equality of opportunity, technical qualifications and a range of other priorities.” It is hard to see how smaller and smaller block grant funding allocations have delivered to myriad priorities and we have yet to see an evaluation of the effectiveness of that funding to support them.

    Given the existing financial pressures within the sector, which some suggest should be addressed by increasing tuition fees (presumably within the same funding methodologies), we suggest a more ambitious review of the funding system is needed to drive support to where it is most needed to preserve a healthy, dynamic and diverse sector that can deliver to a wide range of students across a wide range of locations, especially where there are limited routes into and through higher education.

    Revise funding for skills, research and innovation to drive growth

    The Growth and Skills Levy needs reforming. It needs to better support SMEs, which comprise 99 per cent of all UK employers and account for 61 per cent of total employment. SMEs are critical to most sectors, but they make up the majority of some identified as crucial sectors in the government’s Industrial Strategy, including life sciences, advanced manufacturing and the creative industries. Data from the Department for Culture, Media and Sport suggests that the vast majority of businesses in the creative industries are micro-businesses. To meet the government’s own industrial ambitions, it must not only reconsider how funding can be delivered through and to those SMEs, but also how investment in training could be flexed.

    Recent announcements by the government indicating plans to defund all Level 7 apprenticeships feel tone-deaf for those working in construction, healthcare, engineering and data science fields. To our minds, more technical skills training in fields meant to drive economic growth, which includes a wide range of skills at different levels, is not only a good thing, but is a necessary investment if those ambitions are to be realised. This is not to say we should fund L7 at the expense of lower level apprenticeships. Rather, we are advocating for investment in apprenticeships at all levels indicated as necessary by employers in those sectors where critical skills shortages have been identified as key barriers to economic growth and improvements in our public services.

    But it’s not just about skills training via apprenticeships. It’s also about generating new ideas and innovations to help us work more productively and unlock our abilities to deliver more with fewer tangible resources. To deliver that ambition, both research and innovation funding streams need reform. Higher Education Innovation Fund (HEIF) thresholds should be lowered to remove systemic biases that disadvantage smaller and specialist institutions. Research funding should be adjusted to provide reasonable minimum levels of allocation to all institutions where excellent research is being generated. Doing so would dramatically broaden the UK’s research base rather than deepen it by funnelling greater levels of funding to points where research is already established, thereby expanding research and development capabilities by widening the pool of contributors.

    Doing so would support a regional growth strategy. It would spread money to areas where infrastructure still needs development and could provide incentives in geographical areas where ERDF funding has been lost. Local authorities in non-mayoral regions should also have a clear role in shaping research and innovation policies, with greater collaboration and knowledge-sharing between them and MCA regions to create a more balanced and inclusive approach to regional development.

    A call for an inclusive funding model

    Higher education in the UK is built on a long history of tradition, prestige, and excellence. However, in a time of economic uncertainty and shifting international alliances, we must now innovate to maintain our position on the world stage. While large, generalist institutions continue to play a critical role in advancing knowledge and global competitiveness, they are just one part of the type of healthy higher education ecosystem needed to support 21st century democracies to deliver economically and socially for their citizens. Smaller-scale, specialist and non-traditional institutions with expertise in vocational, professional programmes are equally vital.

    The government has already acknowledged the importance of skills development, regional growth, and public sector workforce expansion in words, but these priorities must be reflected in its spending decisions, policy frameworks and implementation plans. The coming fiscal choices will contribute to whether the UK’s higher education system remains diverse, dynamic, and globally competitive—or whether it risks stagnation.

    Policymakers face a critical choice: will they promote a more balanced and inclusive approach to funding that embraces risk to boost excellence in research, innovation, and skills development? The future of our sector, the UK’s ability to meet its domestic goals, and the growing need for clear, strong and sustainable geopolitical values, depend on it.

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  • The five things universities do to cut costs

    The five things universities do to cut costs

    Incoming Office for Students chair Edward Peck would have expected that many of the questions he would face at his pre-appointment Education Committee hearing would concern the precarious financial situations that are the reality at many higher education institutions.

    His answer to this line of inquiry was instructive. As a part of an urgent briefing with the current chief executive he would want to know:

    the extent to which those universities have done all the things you do as an organisation when you face financial pressures. There are five or six things that you routinely do. To what extent have they been done by those organisations? To what extent is the financial pressure they are facing particularly acute because they have not yet got through all the cost reduction measures that would have enabled them to balance income with expenditure?

    To many with an interest in universities – as places to study, as employers, as local anchor institutions – this idea of “five or six things” would have been confusing and opaque. Is there really a commonly understood playbook for institutions facing financial peril? If there is, why would there be any doubt as to whether senior leaders were following these well-worn tracks to safety? If there genuinely is a pre-packaged solution to universities running out of money, why do so many find themselves in precarious financial situations?

    It would help to take each of these “five or six things” (I’m going to go with five) in turn.

    1. Size and shape

    If your university is smaller than expected in terms of students or income this year, the chances are it has been this size before.

    The sector has grown enormously over the last few years, and the way that funding incentives currently work (both in terms of boom and bust in international recruitment, and the demise – in England – of the old HEFCE tolerance band) has meant that the expansion needed to teach more students, run more estate, or conduct more research has had to happen quickly – taking action when the money and need is there, rather than as a part of a long term plan.

    Piecemeal expansion suffers when compared against strategic growth in that the kinds of efficiencies that a more considered approach offers are simply not available. Planned growth allows you to build capacity in a strategic way, in ways that take into account the wider pressures the institution is facing, the direction it wants to head, or plans for long term sustainability.

    Often senior leaders look back to the resources needed in previous years for a similar cohort or workload in determining costs at a subject area or service level of granularity. If we could teach x undergraduates with y academic staff and z additional resources in 2015–16, why do we need more now? – that’s the question.

    It’s a fair question – but it is a starting point, not a fully formed strategic plan for change. You may need more resources because there is more or different work to do – perhaps your current crop of academics are bringing in research contracts that need specialist support, perhaps the module choices available to undergraduates are more expansive, perhaps the students you are currently recruiting have different support needs. There’s any number of reasons why 2024-25 is not a repeat of 2015-16, and the act of comparison is the start of the conversation that might help unpack some of these a bit.

    2. Pausing and reprofiling

    Imagine that at your university the last few rounds of the national student survey have seen students increasingly bring up the issue of a lack of library capacity as a problem. In response, the initial plan was to increase this capacity – an extension to the existing building paid for with borrowing, refurbishment and update of the rest of the building, and more money for digital resources.

    A sound plan, but three years of lower than expected recruitment, declining income elsewhere, and an increased cost of doing business (construction costs are way up, for example) mean that the idea of putting the plan into action is keeping the director of finance up at night. It may be a necessary improvement, but it is no longer affordable.

    In other words some or all of this valuable work isn’t going to happen this year, as things stand. One decision might be to redesign the project – perhaps covering some of the refurbishment and the content subscriptions but not the new build (and thus not the new borrowing). Even these elements would still have a cost, and with no new finance this would be coming out of recurrent funds. And there’s not as much available as there used to be.

    So the other end of this point is reprofiling existing debt. For even a moderately leveraged university the repayment of capital and interest (under 6 per cent is pretty decent for new borrowing these days) takes up a fair chunk of available recurrent funding each year. If you are able to renegotiate your repayments – extending the loan term perhaps, or offering additional covenants, or both – this frees up recurrent funding to meet other needs.

    Both of these solutions are temporary ones – one day that library will need sorting out, and paying less of your loan back now inevitably means paying more back later. But sometimes suboptimal solutions are all that are available.

    3. Bringing things together

    There may well be cases where the same thing is being done in multiple ways, by multiple teams, across a single institution. There might be benefits in every faculty having an admissions team and a research manager, but in a time of financial constraint you have to ask whether a central team might be more efficient – and whether this efficiency is more important than the benefits being realised from the current configuration.

    Again – the calculus here differs from institution to institution. Where faculty autonomy is the norm, it may be that benefits are being realised that the centre doesn’t know exist, much less understand. As I am sure is becoming increasingly clear, questions like these are the start of a conversation – not the end. Even if in bald resource terms centralisation is a saving, you may not be taking all of the variables into account.

    Conversely, where there are clear savings and no meaningful reduction in benefits you are still entering into a course of action that could prove hugely disruptive to individual staff members. For some, your plan may represent a long hoped for chance for progression or role redesign – for others it may be the push that means that their years of experience are lost to the university as they retire or move to another role. With campus redundancies in the news each week, staff are rightly suspicious of change – bringing people along with new structures requires a huge investment of time and effort in communication, consultation, and flexibility.

    4. Focus

    There are many, many more effective ways to run a surplus than being a university. The converse of this is that people who run universities probably have non-financial reasons to want to run universities rather than running something else. In some of the wilder us-versus-them framings of campus industrial relations we can lose sight of the fact that pretty much everyone involved wants a university to keep on being a university, despite the benefits that would come alongside a sudden pivot into, say, rare earth metal extraction or marketing generative AI.

    That’s an admittedly flippant expression of something that is often forgotten in university strategising. We all have our reasons to be there. Expressing these is often the start of understanding which are the things a particular university does that are non-negotiably essential, and which are the things we do that are either generating income to subsidise these, or facilitating these things being done.

    If there is something that a university is doing that is non-essential, is not helping essential activity to get done, and it is not generating income to subsidise the things that are essential, why is it being done at all?

    Of course, this presupposes that everyone agrees on what activity fits into each category. Even posing the question can be painful. Once again, we are at the very beginning of a journey that probably took up a large part of governance and management meetings over the past few years.

    5. Addressing underperformance

    A couple of years ago, my party trick at conferences involving senior university staff was to show them my “fake subject TEF”. Confronted with a by subject analysis of student progression and satisfaction at their own provider, many of the staff I talked to would give me a similar answer – and it started “ah, I know why that is…”

    The problems our universities face are already known to those who work there. External datapoints only confirm things that are pretty well understood, and usually confirm an instinct to act on them sooner rather than later – a reason why OfS investigations have tended to find the smoking guns already put beyond use by the time they get on campus.

    If the problems within your institution are less obvious, a well-judged comparison with a competitor could help make things clear. A lot of the data you might want to play with is closely guarded, but there are ways in which you might use HESA’s public data to make a start (my tips – Student table 37, Staff table 11, Finance table 8). Otherwise, your staff will have a rich experience of working at other universities – what are the key differences. What is special about the way your place does things – and are there ways you can learn from the way things are done elsewhere.

    Bring to the boil and mix well

    If you are a university governor hoping for the mythical playbook, I can only apologise. If there was an easy way to make university books balance, we wouldn’t be where we are now.

    What is on offer is the hard choices and difficult conversations that will very often lead to arguments, mistrust, and conspiracy theories. At boards and councils up and down the UK, variations on the above conversations are at the root of everything you feel is going wrong on campus.

    You’ll be learning just how good your senior executive and governors actually are at running large, complex, beautiful organisations like universities. Parts of the university you may never have given a second thought to – the planning team, the finance department, the data analysis directorate, internal audit, procurement – will be coming up with ever more ingenious ways to make savings while preserving the university as a whole.

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  • A proper review of student maintenance is now long overdue

    A proper review of student maintenance is now long overdue

    Elsewhere on the site, Esther Stimpson, Dave Phoenix and Tony Moss explain an obvious injustice.

    Universal Credit (UC) reduces by 55p for every £1 earned as income – unless you’re one of the few students entitled to UC, where instead it is reduced by £1 for every £1 you are loaned for maintenance.

    To be fair, when Universal Credit was introduced, the income disregards in the old systems that recognised that students spend out on books, equipment and travel were rolled into a single figure of £110 a month.

    Taper rates were introduced to prevent “benefit traps” where increasing earnings led to disproportionately high reductions in support – and have gone from 65p initially, then to 67p, and now to 55p.

    But for students, there’s never been a taper rate – and that £110 for the costs of books, equipment and travel hasn’t been uprated in over 13 years. Lifelong learning my eye.

    The olden days

    The student finance system in England is full of these problems – probably the most vexing of which is the parental earnings threshold over which the system expects parents to top up to the maximum.

    It’s been set at £25,000 since 2008 – despite significant growth in nominal earnings across the economy since then. IFS says that if the threshold had been uprated since 2008, it would now be around £36,500 (46 per cent higher) in 2023/24.

    That explains how John Denham came to estimate that a third of English domiciled students would get the maximum maintenance package back in 2007. We’re now down to about 1 in 5.

    Add in the fact that the maximums available have failed to increase by inflation – especially during the post-pandemic cost of living spikes – and there’s now a huge problem.

    It’s a particular issue for what politics used to call a “squeezed middle” – the parents of students whose families would have been earning £25,000 in 2007 now have £4,000 more a year to find in today’s money.

    And thanks to the increases in the minimum wage, the problem is set to grow again – when the Student Loans Company comes to assess the income of a single parent family in full time (40 hours) work, given that’s over the £25,000 threshold, it will soon calculate that even that family has to make a parental contribution to the loan too.

    It’s not even as if the means test actually works, either.

    Principles

    How much should students get? Over twenty years ago now, the higher education minister charged by Tony Blair with getting “top-up fees” through Parliament established two policy principles on maintenance.

    The first was Charles Clarke’s aspiration to move to a position where the maintenance loan was no-longer means tested, and made available in full to all full-time undergraduates – so that students would be treated as financially independent from the age of 18.

    That was never achieved – unless you count its revival and subsequent implementation in the Diamond review in Wales some twelve years later.

    Having just received results from the Student Income and Expenditure Survey (SIES) the previous December, Clarke’s second big announcement was that from September 2006, maintenance loans would be raised to the median level of students’ basic living costs –

    The principle of the decision will ensure that students have enough money to meet their basic living costs while studying.

    If we look at the last DfE-commissioned Student Income and Expenditure Survey – run in 2021 for the first time in eight years – median living and participation costs for full-time students were £15,561, so would be £18,888 today if we used CPI as a measure.

    The maximum maintenance loan today is £10,227.

    The third policy principle that tends to emerge from student finance reviews – in Scotland, Wales and even in the Augar review of Post-18 review of education and funding – is that the value of student financial support should be linked somehow to the minimum wage.

    Augar argued that students ought to expect to combine earning with learning – suggesting that full-time students should expect to be unable to work for 37.5 hours a week during term time, and should therefore be loaned the difference (albeit with a parental contribution on a means test and assuming that PT work is possible for all students on all courses, which it plainly isn’t).

    As of September, the National Living Wage at 37.5 hours a week x 30 weeks will be £13,376 – some £2,832 more than most students will be able to borrow, and more even than students in London will be able to borrow.

    And because the Treasury centrally manages the outlay and subsidies for student loans in the devolved nations for overall “equivalence” on costs, both Scotland and Wales have now had to abandon their minimum wage anchors too.

    Diversity

    Augar thought that someone ought to look at London weighting – having not managed to do so in the several years that his project ran for, the review called London a “subject worthy of further enquiry”.

    Given that the last government failed to even respond to his chapter on maintenance, it means that no such further work has been carried out – leaving the uprating of the basic for London (+25 per cent) and the downrating for those living at home (-20 per cent) at the same level as they were in the Education (Student Loans) Regulations 1997.

    Augar also thought student parents worthy of further work – presumably not the subject of actual work because it was DfE officials, not those from the DWP, who supported his review. Why on earth, wonder policymakers, are people putting off having kids, causing a coming crisis in the working age/pensionable age ratio? It’s a mystery.

    Commuters, too. The review supported the principle that the away/home differential should be based on the different cost of living for those living at home but it “suggested a detailed study of the characteristics and in-study experience of commuter students and how to support them better.” It’s never been done. Our series would be a good place to start.

    Things are worse for postgraduates, of course. Not only does a loan originally designed to cover both now go nowhere near the cost of tuition and maintenance, the annually updated memo from the DWP (buried somewhere in the secondary legislation) on how PG loans should be treated viz a vis the benefits system still pretends that thirty per cent of the loan should be treated as maintenance “income” for the purposes of calculating benefits, and the rest considered tuition spend.

    (Just to put that into context – thirty per cent of the current master’s loan of £12,471 is £3,741. 90 credits is supposed to represent 1800 notional hours that a student is spending on studying rather than participating in the labour market. The maintenance component is worth £2.08 an hour – ie the loan is £16,851 short on maintenance alone for a year which by definition involves less vacation time).

    Carer’s Allowance is available if you provide at least 35 hours of care a week – as long as you’re not a full-time student. Free childcare for children under fives? Only if you’re not a full-time student. Pretty much all of the support available from both central government and local authorities during Covid? Full-time students excluded.

    When ministers outside of DfE give answers on any of this, they tell MPs that “the principle” is that the benefits system does not normally support full-time students, and that instead, “they are supported by the educational maintenance system.” What DWP minister Stephen Timms really means, of course, is thank god our department doesn’t have to find money for them too – a problem that will only get worse throughout the spending review.

    Whose problem?

    Back in 2004, something else was introduced in the package of concessions designed to get top-up fees through.

    As was also the case later in 2012, the government naively thought that £3,000 fees would act as an upper limit rather than a target – so Clarke announced that he would maintain fee remission at around £1,200, raise the new “Higher Education grant” for those from poorer backgrounds to £1,500 a year, and would require universities to offer bursaries to students from the poorest backgrounds to make up the difference.

    It was the thin end of a wedge. By the end of the decade, the nudging and cajoling of universities to take some of their additional “tuition” fee income and give it back to students by way of fee waivers, bursaries or scholarships had resulted in almost £200m million being spent on financial support students from lower income and other underrepresented groups – with more than 70 per cent of that figure spent on those with a household income of less than £17,910. By 2020-21 – the last time OfS bothered publishing the spend – that had doubled to £406m.

    It may not last. The principle is pretty much gone and the funding is in freefall. When I looked at this last year (via an FOI request), cash help per student had almost halved in five years – and in emerging Access and Participation Plans, providers were cutting financial support in the name of “better targeting”.

    You can’t blame them. Budgets are tight, the idea of redistributing “additional” fee income a lost concept, and the “student premium” funding given to universities to underpin that sort of support has been tumbling in value for years – from, for example, £174 per disabled student in 2018/19 to just £129 now.

    All while the responsibility for the costs to enable disabled students to access their education glide more and more onto university budgets – first via a big cut in the last decade, and now via slices of salami that see pressure piled on to staff who get the blame, but don’t have the funding to claim any credit.

    Pound in the pocket

    What about comparisons? By European standards, our core system of maintenance looks fairly generous – in this comparison of monthly student incomes via Eurostudent, for example, we’re not far off top out of 20 countries:

    But those figures in Euros are deceptive. Our students – both UG and PG – spend fewer years as full time students than in almost every other country. Students’ costs are distorted by a high proportion studying away from home – something that subject and campus rationalisation will exacerbate rather than relieve.

    And anyway, look at what happens to the chart when we adjust for purchasing power:

    How are students doing financially three years on? The Student Income and Expenditure Survey (SIES) has not been recommissioned, so even if we wanted to, we’d have no data to supply to the above exercise. The Labour Force Survey fails to capture students in (any) halls, and collects some data through parents. Households Below Average Income – the key dataset on poverty – counts tuition fee loans as income, despite my annual email to officials pointing out the preposterousness of that. How are students doing financially? We don’t really know.

    And on costs, the problems persist too. There’s no reliable data on the cost of student accommodation – although what there is always suggests that it is rising faster than headline rates of inflation. The basket of goods in CPI and RPI can’t be the same as for a typical student – but aside from individual institutional studies, the work has never been done.

    Even on things like the evaluation of the bus fare cap, published recently by the Department for Transport, students weren’t set up as a flag by the department – so are unlikely to be a focus of what’s left from that pot after the spending review. See also health, housing, work – students are always DfE’s problem.

    Student discounts are all but dead – too many people see students as people to profit from, rather than subsidise. No government department is willing to look at housing – passed between MHCLG and DfE like a hot potato while those they’d love to devolve to “other” students as economic units or nuisances, but never citizens.

    The business department is barely aware that students work part-time, and the Home Office seems to think that international students will be able to live on the figure that nobody thinks home students can live on. DfE must have done work, you suppose they suppose.

    In health, we pretend that student nurses and midwives are “supernumerary” to get them to pay us (!) to prop up our creaking NHS. And that split between departments, where DfE loans money to students for four years max, still means that we expect medical students in their final two years – the most demanding in terms of academic content and travelling full time to placements – to live on £7,500 a year. Thank god, in a way, that so few poor kids get in.

    It’s not even like we warn them. UK higher education is a £43.9 billion sector educating almost 3m students a year, professes to be interested in access and participation, and says it offers a “world-class student” experience. And yet it can’t even get its act together to work out and tell applicants how much it costs to participate in it – even in one of the most expensive cities in the world.

    Because reasons

    Why are we like this? It’s partly about statecraft. There was an obvious split between education and other departments when students were all young, middle class and carefree, and devolution gave the split a sharper edge – education funding (devolved) and benefits (reserved).

    It’s partly about participation. It’s very tempting for all involved to only judge student financial support on whether it appears to be causing (or at least correlates with) overall enrolment, participation and completion – missing all of the impacts on the quality of that participation in the process.

    Do we know what the long-term impacts are on our human capital of “full-time” students being increasingly anxious, lonely, hungry, burdened and, well, part-time? We don’t.

    Efficiency in provider budgets is about getting more students to share cheaper things – management, space, operating costs and even academics. Efficiency for students doesn’t work like that – it just means spending less and less time on being a student.

    The participation issue is also about the principal – we’ve now spent decades paying for participation expansion ambitions by pushing more and more of the long-run run cost onto graduates – so much so that there’s now little subsidy in the system left.

    And now that the cost of borrowing the money to lend to students is through the roof, increases in the outlay look increasingly impossible.

    Lifelong moaning

    But something will have to give soon. Some five years after Boris Johnson gave a speech at Exeter College announcing his new Lifetime Skills Guarantee, there’s still no news on maintenance – only ever a vague “maintenance loan to cover living costs for courses with in-person attendance” to accompany the detailed tables of credits that get chunked down from the FT £9,535.

    The LLE was partly a product of Augar (more on that on Wonk Corner) – who said that maintenance support should be reserved for those studying at a minimum level of intensity – 25 per cent (15 ECTS a year), and then scaled by credit.

    But think about that for a moment, setting aside that increasingly arbitrary distance learning differential. Why would a student studying for 45 credits only get 3/4 of an already inadequate loan? Will students studying on one of those accelerated degrees get 1.5 x the loan?

    The centrality of credit to the LLE – and its potential use in determining the level of student financial support for their living and participation costs – is fascinating partly because of the way in which a row between the UK and other member states played out back in 2008.

    When ECTS was being developed, we (ie the UK) argued that the concept focused too heavily on workload as the primary factor for assigning credits. We said that credits should be awarded based on the actual achievement of learning outcomes, rather than simply the estimated workload.

    That was partly because the UK’s estimate at the time of 1,200 notional learning hours (derived from an estimate of 40 hours’ notional learner effort a week, multiplied by 30 weeks) was the lowest in Europe, and much lower than the 1,500-1,800 hours that everyone else in Europe was estimating.

    Annex D of 2006’s Proposals for national arrangements for the use of academic credit in higher education in England: The Final report of the Burgess Group put that down to the UK having shorter teaching terms and not clocking what students do in their breaks:

    It could be argued that considerably more learner effort takes place during the extended vacations and that this is not taken into account in the total NLH for an academic year.

    Those were the days.

    In the end an EU fudge was found allowing the UK to retain its 20 notional hours – with a stress that “how this is applied to a range of learning experiences at a modular or course level will differ according to types of delivery, subject content and student cohorts” and the inclusion of “time spent in class, directed learning, independent study and assessment.”

    A bit like with fees and efficiency, if in the mid noughties it was more likely that students were loaned enough to live on, were posh, had plenty of spare time and had carefree summers, that inherent flex meant that a student whose credit was more demanding than the notional hours could eat into their free time to achieve the learning outcomes.

    But once you’ve got a much more diverse cohort of students who are much more likely to need to be earning while learning, you can’t really afford to be as flexible – partly because if you end up with a student whose characteristics and workload demand, say, 50 hours a week, and a funding system that demands 35 hours’ work a week, once you sleep for 8 hours a night you’re left with less than 4 hours a day to do literally anything else at all.

    Think of it this way. If it turns out that in order to access the full maintenance loan, you have to enrol onto 60 ECTS a year (the current “full-time” position), we are saying to students that you must enrol onto credits theoretically totalling at the very very least 1,200 hours of work a year. We then loan them – as a maximum – £8.52 an hour (outside London, away from home). No wonder they’re using AI – they need to eat.

    If it then turns out that you end up needing to repeat a module or even a year, the LLE will be saying “we’ve based the whole thing on dodgy averages from two decades ago – and if you need to take longer or need more goes at it, you’ll end up in more debt, and lose some of your 4 years’ entitlement in the process”. Charming.

    A credit system whose design estimated notional learning hours around students two decades ago, assumed that students have the luxury of doing lots of stuff over the summer, and fessed up that it’s an unreliable way of measuring workload is not in any world a sensible way to work out how much maintenance and participation cost support to loan to a student.

    Pretty much every other European country – if they operate loans, grants or other entitlements for students – regards anyone studying more than 60 (or in some cases, 75) credits as studying “full-time”.

    That allows students to experience setbacks, to accumulate credit for longer, to take time out for a bereavement or a project or a volunteering opportunity – all without the hard cliff edges of “dropping out”, switching to “part-time” or “coming back in September”. Will our student finance system ever get there? Don’t bet on it.

    If the work (on workload) isn’t done, we’ll be left with definitions of “full-time” and “part-time” student that are decades old – such that a full-time student at the OU can’t get a maintenance loan, while an FT UG at a brick university that barely attends in-person can – that pretty much requires students to study for more credit than they can afford to succeed in.

    Oh – and if the loan is chunked down for a 30 credit module, how will the government prevent fraud?

    Via an FOI request, the SLC tells me that last year, almost 13,000 students FT students in England and Wales managed to pull down installment 1 of their loan without their provider pulling down installment 1 of the fee loan. Anyone that thinks that’s all employer funding will shortly be getting my brochure on bridges.

    Maintenance of a problem

    Our system for student living and participation costs may, by comparison with other systems, appear to be a generous one – especially if you ignore the low number of years that students are in it, and how much they eventually pay back. But make no mistake – our student finance system is completely broken – set up for a different sector with different students that has no contemporary basis in need, ambition or impact.

    Its complexity could not be less helpful for driving opportunity, its paucity is likely to be choking our stock of human (and social) capital (and resultant economic growth), and its immediate impacts have normalised food banks on campus – real poverty that universities neither can nor should be expected to alleviate with other students’ fees and debt.

    The signals and signs are of danger ahead – a minister keen to stress that the “fundamentals” of the system we have for funding higher education won’t change reminds us both of a lack of money and a bandwidth issue. It’s one whose solution requires real research, cross-departmental and nations working, and a proper sense of what we want students to be, experience and learn. Sadly, that also sounds like a solution that lends itself to long grass.

    Given everything else going on in the world right now, maybe that’s inevitable. But decade after decade, every time we put off a proper review, or over-prioritise university rather than student funding in the debates, we dodge the difficult questions – because they’re too complex, because the data isn’t there, because it’s another department’s problem, because reasons.

    If Bridget Phillipson is serious about “fixing the foundations” to “secure the future of higher education” so that “students can benefit from a world-class education for generations to come”, she needs to commission a dedicated student maintenance review. Now.

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  • Universities that expand access have graduates who take longer to repay their loans

    Universities that expand access have graduates who take longer to repay their loans

    I’ll admit that the Neil O’Brien-powered analysis of graduate repayments in The Times recently annoyed me a little.

    There’s nothing worse than somebody attempting to answer a fascinating question with inappropriate data (and if you want to read how bad it is I did a quick piece at the time). But it occurred to me that there is a way to address the issue of whether graduate repayments of student loans do see meaningful differences by provider, and think about what may be causing this phenomenon.

    What I present here is the kind of thing that you could probably refine a little if you were, say, shadow education minister and had access to some numerate researchers to support you. I want to be clear up top is that, with public data and a cavalier use of averages and medians, this can only be described as indicative and should be used appropriately and with care (yes, this means you Neil).

    My findings

    There is a difference in full time undergraduate loan repayment rates over the first five years after graduation by provider in England when you look at the cohort that graduated in 2016-17 (the most recent cohort for which public data over five years is available).

    This has a notable and visible relationship with the proportion of former students in that cohort from POLAR4 quintile 1 (from areas in the lowest 20 per cent of areas).

    Though it is not possible to draw a direct conclusion, it appears that subject of study and gender will also have an impact on repayments.

    There is also a relationship between the average amount borrowed per student and the proportion of the cohort at a provider from POLAR4 Q1.

    The combination of higher average borrowing and lower average earnings makes remaining loan balances (before interest) after five years look worse in providers with a higher proportion of students from disadvantaged backgrounds..

    On the face of it, these are not new findings. We know that pre-application background has an impact on post-graduation success – it is a phenomenon that has been documented numerous times, and the main basis for complaints about the use of progression data as a proxy for the quality of education available at a provider. Likewise, we know that salary differences by gender and by industry (which has a close but not direct link to subject of study).

    Methodology

    The Longitudinal Educational Outcomes dataset currently offers a choice of three cohorts where median salaries are available one, three, and five years after graduation. I’ve chosen to look at the most recent available cohort, which graduated in 2016-17.

    Thinking about the five years between graduation and the last available data point, I’ve assumed that median salaries for year 2 are the same as year 1, and that salaries for year 4 are the same as year 3. I can then take 9 per cent of earnings above the relevant threshold as the average repayment – taking two year ones, two year threes, and a year five gives me an average total repayment over five years.

    The relevant threshold is whatever the Department for Education says was the repayment threshold for Plan 1 (all these loans would have been linked to to Plan 1 repayments) for the year in question.

    How much do students borrow? There is a variation by provider – here we turn to the Student Loans Company 2016 cycle release of Support for Students in Higher Education (England). This provides details of all the full time undergraduate fee and maintenance loans provided to students that year by provider – we can divide the total value of loans by the total number of students to get the average loan amount per student. There’s two problems with this – I want to look at a single cohort, and this gives me an average for all students at the provider that year. In the interests of speed I’ve just multiplied this average by three (for a three year full time undergraduate course) and assumed the year of study differentials net out somehow. It’s not ideal, but there’s not really another straightforward way of doing it.

    We’ve not plotted all of the available data – the focus is on English providers, specifically English higher education institutions (filtering out smaller providers where averages are less reliably). And we don’t show the University of Plymouth (yet), there is a problem with the SLC data somewhere.

    Data

    This first visualisation gives you a choice of X and Y axis as follows:

    • POLAR % – the proportion of students in the cohort from POLAR4 Q1
    • Three year borrowing – the average total borrowing per student, assuming a three year course
    • Repayment 5YAG – the average total amount repaid, five years after graduation
    • Balance 5YAG – the average amount borrowed minus the average total repayments over five years

    You can highlight providers of interest using the highlighter box – the size of the blobs represents the size of the cohort.

    [Full screen]

    Of course, we don’t get data on student borrowing by provider and subject – but we can still calculate repayments on that basis. Here’s a look at average repayments over five years by CAH2 subject (box on the top right to choose) – I’ve plotted against the proportion of the cohort from POLAR4 Q1 because that curve is impressively persistent.

    [Full screen]

    For all of the reasons – and short cuts! – above I want to emphasise again that this is indicative data – there are loads of assumptions here. I’m comfortable with this analysis being used to talk about general trends, but you should not use this for any form of regulation or parliamentary question.

    The question it prompts, for me, is whether it is fair to assume that providers with a bigger proportion of non-traditional students will be less effective at teaching. Graduate outcome measures may offer some clues, but there are a lot of caveats to any analysis that relies solely on that aspect.

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  • The government’s in a pickle over fees and funding

    The government’s in a pickle over fees and funding

    We’re increasingly relying on Wales to get intel on where the Westminster government’s thinking is on higher education finance.

    As DK notes elsewhere on the site, Vikki Howells, Minister for Further and Higher Education in the Welsh Government, has announced an additional £18.5m in capital funding for estate maintenance and digital projects to reduce costs, improve sustainability, and enhance the student experience.

    But the other thing that happened was disclosed in the papers outlining the 2024–25 supplementary budget process. That contains a change in the student loan resource budget from £277m in October to £428m now. That feels like a big thing, and it’s worth unpacking why.

    Imagine for a minute that you own a pub, and you let students run up a tab. Then imagine that you expect them to gradually pay you back over decades – “pay us back when you can afford it mate”, or an “income contingent” loan.

    If you were trying to work out how well off you are now by thinking of how much that group of students will pay you back, you’d have to guess how much money they’ll have and when, and how much of that they’ll give you at a given point.

    But you’d need to guess how much that future money will be worth.

    The thing about student loans – and how they’re treated in the national accounts (including the “devolved” national accounts of the nations) – is that that’s broadly how it’s done.

    Before 2020, the government accounted for student loans in a way that understated their real cost. Every loan was recorded in the national accounts as if it would be fully repaid, plus interest.

    But a significant portion of loans would always be written off, but this wasn’t properly accounted for. This made the government’s books look better – despite knowing that many students would never repay in full. That “fiscal illusion” allowed George Osborne to spare higher education from austerity while your local council was cutting bin collections.

    Then ONS forced the government to acknowledge that much of the money lent to students wouldn’t be repaid. The removal of the “fiscal illusion” means that now, every loan is split into two parts – the part expected to be repaid, which is counted as an asset, and the part likely to be written off, which is counted as spending immediately.

    That sounds sensible – it makes the true cost of student loans more transparent in government accounts. But then, things got complicated – because that calculation has to be constantly revised.

    A scenario

    Imagine a student owes you £10,000 in 30 years. How much is that worth to you today? If you expect high investment returns elsewhere, future money is worth less today because you could invest it and earn more. Conversely, if expected returns are low, future money retains more value in today’s terms.

    So if you expect high investment returns elsewhere, you might say: “That £10,000 in 30 years is worth only £3,000 to me today.” If you expect low investment returns, you might say: “That’s still worth £7,000 to me today.”

    And so for the government, the “discount rate” is how they decide how much future student loan repayments are worth in today’s money.

    The higher the discount rate, the less future repayments are worth today and the more expensive student loans appear in the accounts. The lower the discount rate, the more valuable future repayments seem, and the cheaper student loans look on paper.

    Every so often, His Majesty’s Treasury (HMT) revises the discount rate – and a wander down the rabbit hole reveals that it’s gone up again – which means the government is now valuing future student loan repayments less in today’s terms. Hence the change in Wales.

    Why? Because the government’s own borrowing costs have risen.

    Lend us a fiver mate

    The government raises money by selling bonds (gilts), and the interest rates on those bonds (gilt yields) have gone up. Money is loaned to the government but those loaning it expect higher returns.

    Because the government is borrowing more money, lending to it is riskier. Inflation is higher, so investors want more interest to protect the value of their money. And there’s more economic uncertainty, so investors demand higher returns to compensate for potential risks.

    Then, as other investment options become more attractive, the government needs to offer better rates to compete for investors’ money. All of that combined makes investors ask for higher interest rates when lending to the government.

    So the government now pays more to borrow money. Then when it lends it out, like those lending to the government, it expects higher returns to match its increased costs. That makes the government value future student loan repayments less in today’s money. It’s like saying, “If I’m paying more to borrow, I need to earn more when I lend.”

    As a result, the government sees student loans as less valuable now, even though students will still repay the same amount in the future – and so when that discount rate changes, it suddenly makes loans look more expensive in government accounts.

    So what?

    In theory, if the interest rate on student loans goes up, expected total repayments grow faster. It should make the loan book appear more valuable today – because the government would record a lower upfront cost for issuing the loans.

    Then if it wanted to reduce the reported cost of student loans, you’d think they would increase interest rates, which lowers the “cost” of issuing loans in the accounts. Graduates would pay more, but in the government accounts, loans would look cheaper to taxpayers.

    But in 2023, Rishi Sunak’s reforms actually lowered interest rates for new students – from RPI+3% to RPI. This means future repayments won’t grow as quickly, so the value of the loan book shrank. Why did he do that with no obvious political benefit?

    The weird thing is that lowering interest rates on student loans can actually make them look less expensive for the government in the short term, even though the actual long-run costs have increased.

    That’s because the government only records the part of loans that won’t be repaid as a cost upfront, while treating the rest as an asset. Because lower interest rates mean students are expected to repay less overall, the unpaid portion of loans (write-off) shrinks – so the immediate cost to the government looks smaller.

    But because the government borrows money to fund these loans, and its own borrowing costs are rising, a big financial hit comes later when it earns less from student loan interest while still paying more to finance the system.

    And when the Treasury gets round to noticing that second part, it adjusts the discount rate – and then the hit appears in the accounts. Cheers, Rishi.

    As IFS says, all of the above means that the official statistics are likely constantly understating the true cost of the student loans system to the taxpayer:

    The ONS [government accounts] measure focuses only on the share of loans that is not repaid in full and thus misses the spread between government borrowing costs and student loan interest rates, which is now expected to be negative.

    And that all then ends up having implications for future reform.

    What next?

    The Russell Group’s spending review submission doesn’t touch on any of this. Nor does Guild HE’s. Universities UK’s submission is silent on it too.

    But Rachel Reeves has set a spending envelope. Her new Public Sector Net Financial Liabilities (PSNFL) measure is a broader measure of government debt that includes both traditional borrowing (like gilts) and other financial commitments, including student loans.

    It differs from the old Public Sector Net Debt (PSND) because PSND only counts traditional government borrowing, whereas PSNFL includes all financial assets and liabilities – including the value of student loans.

    So increasing the value of student loans – tuition or maintenance – would classify these loans as financial assets under PSNFL. But the Office for Budget Responsibility (OBR) says that practices like that might hide underlying fiscal risks, because loans are recorded as assets regardless of the probability of repayment. If a big(ger) portion of these loans is not repaid that would hit the public finances.

    Providing bigger (tuition or maintenance) grants instead of loans would result in immediate government expenditure, increasing the deficit in the short term. That could conflict with the government’s fiscal mandate to achieve a balanced or surplus current budget by 2029–30. Grants don’t add to future liabilities, but they do directly impact day-to-day spending, making it harder to adhere to Reeves’ fiscal rules.

    Government investment in university infrastructure – like funding for new buildings and research facilities – is capital expenditure, typically financed through borrowing. Under current fiscal rules, the government has to ensure that Public Sector Net Financial Liabilities (PSNFL) fall as a share of the economy by 2029–30. Investments like that might be crucial for long-term growth, but increased borrowing adds to public debt. So to stay within fiscal limits, the government has to manage the spending to prevent an unsustainable rise in its future financial liabilities.

    Politically, it may also want to consider relieving the pressure on young/new graduates – by raising the repayment threshold, or introducing stepped repayments. But then to pay for any or all of the above, it would need to introduce steeper interest rate bands so that higher earners pay more, have a higher repayment rate for higher earners, or look again at early repayment penalties to maintain long-term repayment contributions. And they would all bring political costs.

    The iceberg and the tip

    And that’s the irony. When the last government gave a (graduate) tax cut to higher earners by cutting interest to RPI, the idea was that they would pay no more, no less than the “real” cost of their HE – and that was paid for by lower earners paying more back, rather than having profit from higher earners subsidising lower earners.

    But once the cost of borrowing the money to loan to students starts to exceed inflation, the government loses money on every loan. That’s why from a government point of view, aligning student loan interest rates with the government’s long-term borrowing costs would make more sense.

    Having interest rates that are significantly lower than the government’s borrowing costs results in an expensive subsidy spent on the rich – it benefits higher earners who would repay their loans even with higher interest rates. Low-earning graduates, who are less likely to repay their loans in full, get no benefit.

    So the rich either pay upfront through the great boomer wealth transfer, or go into the loan scheme and pay less than the loan costs. While everyone, and everything, else suffers.

    Just like the student housing problem, financing things through borrowing is fine when the costs of borrowing are low, and crucially lower than inflation. But once that becomes your default way of financing something, it’s like an iceberg – at the tip you have the tuition fee, below that there’s the value of maintenance, below that is the terms you offer for paying you the money back that you lend out, but what ends up driving everything deeper down is the cost of borrowing it to lend out in the first place.

    Put another way, and to return to the pub, what I didn’t say at the start was that you as the landlord of the Dickinson Arms used to be able to borrow money at low rates to buy stock, pay staff, and maintain the premises. You offered loans or credit to regulars who weren’t able to pay immediately, figuring that the low cost of borrowing made it a sustainable business model. You offered affordable pints and generous credit terms, confident that the costs of borrowing were lower than the rate of inflation.

    But the cost of borrowing is up. Each barrel of beer bought on credit now costs you more to finance than it did before. You continue offering low-interest loans to your punters, but the true cost of financing is being hidden beneath the surface, gradually growing into a larger financial burden. And at some stage, the pub becomes insolvent. That’s the real problem the government faces now over HE reform – one that spending review submissions from sector bodies really did need to address.

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  • Competition law is a constraint to collaboration in HE but it need not be an impediment

    Competition law is a constraint to collaboration in HE but it need not be an impediment

    There has been much discussion in recent months about financial pressures in the higher education sector and what could be done by stakeholders in the sector – government, regulators and higher education institutions themselves – to address these.

    One such proposal is a strategy of “radical collaboration” between institutions, ranging from mergers to federations, or shared services and centrally operated services. Indeed, the Office for Students (OfS) has cited radical collaboration as a likely response to the financial challenges in the sector:

    Where necessary, providers will need to prepare for, and deliver in practice, the transformation needed to address the challenges they face. In some cases, this is likely to include looking externally for solutions to secure their financial future, including working with other organisations to reduce costs or identifying potential merger partners or other structural changes.

    This notion of radical collaboration goes beyond the traditional practice of academically driven collaboration. Instead, in this context radical collaboration refers to deeper, more extensive and far-reaching strategic collaboration, involving institutions working together to achieve a strategic shared mission and/or efficiencies. This might include, for example, curriculum sharing, or collaborating on a regional basis where institutions collectively decide which is best placed to deliver particular courses or subject areas.

    While the notion of “radical collaboration” may present a potentially appealing way of responding to the challenges that the sector is facing, there is, however, a significant tension between the principles of such transformational integration and the principles of competition law. As things currently stand, many forms of greater integration between institutions, particularly in relation to curriculum mapping and sharing the provision of courses, would breach the competition rules.

    UK competition law and higher education

    Competition laws seek to safeguard free and fair competition between “undertakings” (ie any entity that is engaged in economic activity) for the benefit of consumers, with the aim of creating competitive markets which benefit from the efficient allocation of resources; innovation; lower prices; increased choice; and better-quality products and services for customers.

    Competition laws therefore prohibit agreements and understandings between independent “undertakings” that have, as their object or effect, the prevention, restriction or distortion of competition. Some agreements are regarded as being so harmful to competition in their nature that they are prohibited outright, for example, agreements between competitors to fix prices, share markets, limit output, or co-ordinate or rig tenders. These types of agreements are highly likely to attract vigorous enforcement action by the competition authorities, including the imposition of substantial fines. A finding that an organisation has breached competition rules (or even an allegation of a breach) would inevitably lead to negative publicity and reputational harm.

    While the higher education sector may not bear all the hallmarks of a traditional, fully competitive market, it does fall within the scope of the UK’s competition law regime. Higher education institutions are “undertakings” for the purposes of competition law because they are engaged in “economic activities”; they provide education and other ancillary services to undergraduate and postgraduate students, create jobs which benefit their local and the national economy, as well as develop new products and services.

    Moreover, higher education institutions have to compete to “win” students, competing to a certain extent on price, in the context of international or postgraduate provision, but primarily on non-price factors of competition, such as choice of course/course content; quality of provision; reputation; and the range and quality of ancillary services, such as sports provision, accommodation and other student services. Higher education institutions also compete in “upstream” labour markets to attract and retain talent (ie teaching and research staff).

    Collaboration between sector participants can undoubtedly be positive and pro-competitive. Such arrangements may be permitted by competition law if (among other things) the collaboration produces efficiencies which benefit consumers. For example, when properly structured, benchmarking exercises or arrangements between institutions to share facilities can lead to the more efficient allocation of resources. However, collaboration between sector participants which dampens or reduces the levels of competition that would otherwise exist between them, and/or which produces no clear benefits for consumers, risks breaching the competition rules.

    A clear understanding of where the line is drawn between collaboration which promotes competition and delivers consumer/student benefits, and collaboration which reduces or distorts competition, is therefore important. If this boundary is not well understood, or the boundary itself is not appropriately drawn, the competition rules could act as a barrier to the very innovation and collaboration which the OfS and the government are relying upon to alleviate some of the pressures facing the sector. Indeed, in an interview last week, vice chancellor of Cardiff University Wendy Larner commented that competition law was preventing the kind of collaboration on course provision that she felt was necessary.

    Competition regulation from OFT to CMA

    More recent regulatory scrutiny of the sector has focused on consumer law aspects. Nonetheless, the Competition and Markets Authority (CMA) and its predecessor, the Office of Fair Trading (OFT), have reviewed mergers between higher education institutions – for example, the University of Manchester / Victoria Manchester / University of Manchester Institute of Science and Technology merger in 2005. And in 2014, the OFT conducted a call for evidence in order to gain a better understanding of how choice and competition were working in the higher education sector in England in response to policy developments that sought to foster the development of a competitive market.

    The OFT’s report, following the call for evidence, noted that the most “serious and prevalent” concerns raised by stakeholders related to the extent to which fears of breaching competition law might hinder beneficial cooperation between institutions. However, the report also noted that despite “many generic references” by stakeholders to the potential (perceived) tensions between collaboration and competition, “there were no substantive examples that would justify, because of their relevance and/or novel nature, the production of specific OFT guidance beyond that already available.”

    That said, the report also noted that there was scope for the (then incoming) CMA to highlight that:

    • cooperation which delivers countervailing consumer benefits (ie benefits to students) may not pose a problem – examples given included benchmarking data; academic partnerships; sharing facilities; joint procurement activities.
    • where cooperation between higher education institutions can promote efficiencies, collaboration should be allowed to take place.

    The OFT’s report was published a decade ago at a time when the sector was arguably in a different place. The types of collaborative activities identified by the OFT in its report as being beneficial and delivering benefits to students were very much the more traditional forms of cooperation and certainly some way removed from the radical collaboration concepts being discussed at present.

    It also appears to be the case that a lack of concrete examples demonstrating where the competition rules had, in practice, posed a barrier to beneficial collaboration influenced the OFT’s thinking. It is perhaps for this reason that the OFT’s findings were limited to acknowledging that cooperation which results in efficiencies should be allowed to take place and reminding institutions of the possibility of relying on an individual exemption from the competition rules.

    An individual exemption involves the institution(s) in question conducting a self-assessment of whether the proposed agreement restricting competition will benefit consumers to an extent that outweighs the harm to competition. In practical terms the notion of relying on a self-assessed individual exemption may not be attractive to many institutions. Four cumulative criteria must be met for the exemption to apply and, if the agreement is challenged, the party relying on the exemption bears the burden of proof for substantiating, with specific evidence, that the exemption criteria are met.

    Undertaking the self-assessment process in advance of entering into any agreement around radical collaboration would be a significant, evidence driven compliance exercise involving financial and economic modelling. However, even if institutions (and their advisors) were to conclude that it is likely that the exemption criteria are met, there would always be the risk that the CMA or a court might take a different view of the evidence and would disagree. Institutions may not be prepared to proceed with a high-stakes radical collaboration against this backdrop of uncertainty.

    Moreover, the criteria for individual exemption include the requirement that an agreement must improve production or distribution, or promote technical or economic progress, “while allowing consumers a fair share of the resulting benefit.” Consumers in this scenario means students. In other words, to rely on the exemption, any benefits accruing to the participating institutions from the collaboration must be passed on to a sufficient extent to the students. It would have to be demonstrated, with evidence, that the collaboration would result in lower prices, or better choice and quality, for students. It would not be enough for participating institutions to demonstrate that benefits merely accrue to them.

    It is also worth remembering that the CMA may offer non-binding views on the application of the competition rules to “novel” questions. The CMA has in fact expressed that it is open to hearing from the sector, perhaps in response to the vice-chancellor of Cardiff University’s critical comments.

    While seeking a non-binding view on a proposed form of radical collaboration may sound appealing, it is open to debate whether some of the collaboration proposals which have been mooted are genuinely “novel” in competition terms. For example, an agreement between competing institutions about who will offer certain courses would almost certainly be characterised as market sharing, a serious breach of the competition rules.

    What will it take to get things moving

    There’s an argument to be made about whether a wider national agenda from government on driving forward radical collaboration in higher education is needed, which takes into account the competition law issues. Similar questions to those facing higher education were recently debated in the competition law community in the context of how the competition rules apply to sustainability agreements – agreements between industry participants which are aimed at preventing, reducing or mitigating the adverse impact that economic activities have on the environment, or assist with the transition towards environmental sustainability. Specifically, a number of organisations had voiced concerns that the fear of inadvertently breaching the competition rules was preventing beneficial sector and industry collaborations aimed at delivering sustainability goals.

    In response, a number of competition authorities – including the CMA – proactively published guidance to help organisations apply the competition rules to sustainability agreements and collaborations. The CMA published its Green Agreements Guidance in October 2023 containing a clear statement of intent, along with practical and user-friendly guidance, that competition law should not impede legitimate collaboration between businesses that is necessary for the promotion or protection of environmental sustainability.

    The guidance also sets out welcome details of an open-door policy, by which businesses considering entering into an environmental sustainability agreement can approach the CMA for informal guidance on their proposed agreement if there is uncertainty on the application of the guidance. This policy also provides some reassurance that the CMA would not expect to take enforcement action against environmental sustainability agreements that correspond clearly to the principles set out in the guidance.

    To date the CMA has published two opinions under its open-door policy. These in turn form the beginnings of a body of decisional practice which will help inform organisations, as well as advisors, on the CMA’s approach to collaboration in this area, aiding self-assessment and informed decision-making.

    Given the extensive challenges facing the higher education sector, and the passage of time since the OFT’s call for information in 2014, this might be an opportune moment for the CMA to consider the specific issues facing the sector and to engage with the sector more extensively on how the competition rules apply in the sector.

    Taking steps to support a viable, flourishing higher education sector which, among other public goods, boosts economic growth, would undoubtedly be aligned with the government’s growth mission and, in turn, aligned with a key pillar of the CMA’s strategy of driving productive and sustainable growth. To the extent that the competition rules are perceived by institutions as presenting a barrier to collaboration that would deliver benefits to students, and where there are examples which show this, there may now be a case for specific higher education focused guidance, similar to the approach taken to the Green Agreements Guidance. Clear guidance, including worked examples on how the individual exemption should be applied and understood in the context of the higher education sector, could be a positive and welcome step forward.

    In a recent speech interim Executive Director for Competition Enforcement at the CMA Juliet Enser noted the work of the CMA in ensuring that its enforcement activities do not have a chilling effect on pro-competitive collaborations between competitors, referring to the sustainability guidance and the CMA’s work on competitor collaborations in the pharmaceutical sector. Enser said “where we are convinced on the evidence that there is a real risk, that absent our providing appropriate comfort, the economy will lose out on beneficial collaboration then we are prepared to act.”

    This is a positive statement from the CMA, signalling a proactive willingness to engage. In turn, the higher education sector could seize upon this invitation and commence a dialogue with the CMA, providing examples and evidence of where clarity on the application of the competition rules to the sector is needed, so that stakeholders can work towards pro-competitive collaborations which may ultimately benefit students, the higher education sector and the economy at large.

    This article is published in association with Mills & Reeve. Join us on Tuesday 4 March 12.00-1.00pm for Connect more, a free online event exploring the potential for more system-wide collaboration in higher education in England. Find out more and register here.

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  • An early look at 2023–24 financial returns shows providers working hard to balance the books

    An early look at 2023–24 financial returns shows providers working hard to balance the books

    In most larger UK providers of higher education, the 2023–24 financial year ended on 31 July 2024.

    Five months and two weeks after this date (so, on or before 14 January 2025) providers are obliged to have published (and communicated to regulators) audited financial statements for that year.

    I’ve got a list of 160 large, well known, providers of higher education who should, by now, have made this disclosure – 43 of them are yet to do so. Of the 117 that have, just 15 (under 13 per cent) posted a deficit for that financial year (to be fair, this includes eight providers in Wales, where the deadline – for bilingual accounts – is the end of the month). This was as of the data of publication, there’s been a few more been discovered since then and I have added some to the charts below.

    If you’ve been aware of individual providers, mission groups, representative bodies, trade unions, regulators, and politicians coming together to make the case that the sector is severely underfunded this may surprise you. If you work in an institution that is curtailing courses, making staff redundant, and undergoing the latest in a long series of cost-cutting exercises, the knowledge that your university has posted a surplus may make you angry.

    But these results are not surprising, and a surplus should not make you angry (there are plenty of other reasons to be angry…) Understanding what an annual account is for, what a surplus is, why a university will pull out all of the stops to post a surplus, and what are the more alarming underpinning signals that we should be aware of will help you understand why we have what – on the face of it – feels like a counter-intuitive position in university finances.

    Why are so many results missing?

    There’s a range of reasons why a provider may submit accounts late – those who are yet to publish will already be deep in conversation with regulators about the issues that may have caused what is, technically, a breach of a regulatory condition. In England, this is registration condition E3. which is underpinned by the accounts direction.

    If you are expecting regulators to get busy issuing fines or sanctions for late submissions – you should pause. There’s a huge problem with public sector audit capacity in the UK – the big players have discrete teams that move on an annual cycle between higher education, NHS, and local government audit. You don’t need to have read too much into public finances to know that our councils are under serious pressure right now – and this pressure results in audit delays, hitting the same teams who will be acting as external university auditors.

    That’s one key source of delay. The other would be the complexities within university annual accounts, and university finances more generally, that offer any number of reasons why the audit signoff might happen later than hoped.

    To be clear, very few of these reasons are going to be cheerful ones. If a provider has yet to publish its accounts because they have not signed off their accounts, it is likely to be engaging with external auditors about the conditions under which they will sign off accounts.

    To give one example of what might happen – a university has an outstanding loan with a covenant attached to it based on financial performance (say, a certain level of growth each year). In 2023–24, it did not reach this target, so needs to renegotiate the covenant, which may make repayments harder (or spread out over a longer period). The auditor will need to wait until this is settled before it signs off the accounts – technically if you are in breach of covenant the whole debt is repayable immediately, something which would make you fail your going concern test.

    We’ve covered covenants on the site before – a lender of whatever sort will offer finance at an attractive rate provided certain conditions are met. These can include things like use of investment (did you actually build the new business school you borrowed money to build?), growth (in terms of finances or student numbers), ESG (are you doing good things as regards environment, society, and governance?) and good standing (are you in trouble with the regulator?) – but at a fundamental level will require a sense that your business is financially viable. If covenant conditions are breached lenders will be keen to help if they hear in advance, but your cost of borrowing (the interest rate charged, bluntly) will rise. And you will find it harder to raise finance in future.

    This is an environment where it is already hard to raise finance – and in establishing new borrowing, or new revolving credit (kind of like an overdraft facility) many universities will end up paying more than in previous years. This all needs to be shown in the accounts.

    Going concern

    When your auditor signs off your accounts, you would very much hope that it will agree that they represent a “going concern” – simply put, that in most plausible scenarios you will have enough money to cover your costs during the next 12 months. If your auditor disagrees that you are a going concern you are in serious trouble – all of the 117 sets of accounts I have read so far have been agreed on a going concern basis.

    This designation tells everyone from regulators to lenders to other stakeholders that your business is viable for the next year – and comes into force on the day your accounts are signed off by the university and external auditor. This is nearly always for a specific technical reason – additional information that is needed in order to make the determination. For some late publications, it is possible that the delay is a deliberate plan to make the designation last as far into the following financial years as possible. This year (2024–25) is even more bleak than last year – anything that keeps finance cheaper (or available!) for longer will be helpful.

    Breaking even and beyond

    So your provider had a surplus last year – that’s good right? It means it took in more money than it spent? Up to a point.

    In 2023–24 we got the very welcome news that Universities Superannuation Scheme (USS) has been revalued and contributions reduced for both members and employers. From the annual accounts perspective, this will have lowered staff costs (very often one of the most significant costs, if not the most significant cost, for most) in USS institutions. Conversely, the increase in Teachers Pension Scheme (TPS) contributions will have substantially raised costs in institutions required by law (yes, really!) to offer that scheme to staff.

    That’s some of the movement in staff costs. However, for USS, the value of future contributions to the current calculated scheme debt (which is shared among all active employers in the scheme) has also fallen. Indeed, as the scheme is currently in surplus, it shows as income rather than expenditure This is not money that the university actually has available to spend, but the drop shows out in staff costs – though most affected separate this out into a separate line it also shows up in the overall surplus or deficit (to be clear this is the accounting rules, there’s no subterfuge here: if you are interested in why I can only point you to BUFDG’s magisterial “Accounting for Pensions” guidelines).

    For this reason, many USS providers show a much healthier balance than accurately reflects a surplus they can actually spend or invest. This gives them the appearance of having performed as a group much better than TPS institutions, where the increase in contributions has made it more expensive to employ staff.

    Here I show the level of reported surplus(deficit) after tax, both with and without the USS valuation effect. Removing the impact of valuation puts 35 providers (including big names like Hull, Birmingham, and York) in deficit based on financial statements published so far.

    [Full screen]

    And here I show underlying changes in staff costs (without the USS valuation effect). This is the raw spend on employing staff, including pay and pensions contributions. A drop could indicate that economies have been sought – employing fewer staff, employing different (cheaper) staff, or changes in terms and conditions. But it also indicates underlying changes in TPS contributions (up) or USS contributions (down) with respect to current employees on those schemes.

    [Full screen]

    Charts updated 11am 27 January to remove a handful of discrepancies.

    Fee income

    For most universities the main outgoing is staff costs, and the main source of income is tuition fees. Much has been made of the dwindling spending power of home undergraduate fees because of a failure to uprate with inflation, but this line in the accounts also includes unregulated fees – most notably international fees and postgraduate fees. The full name of the line in the accounts is “tuition fees and educational contracts”, so if your provider does a lot of bespoke work for employers this will also show up here.

    Both of these areas of provision have seen significant expansion in many providers over recent years – and the signs are that 2023–24 was another data point aligned with this trend for postgraduate provision. For this reason, the total amount of fee income has risen in a lot of cases, and when we get provider level UCAS data shortly it will make it clear that just how much of this is due to unregulated fees. International fees are another matter, and again we need the UCAS end of cycle data to unpick it, but it appears from visa applications and acceptances that from some countries (China, for example) demand has remained stable, while for others (Nigeria, India) demand has fallen.

    Here I show fee income for the past two years, and the difference. This is total fee income, and does not discriminate between types of fees.

    [Full screen]

    One very important thing to bear in mind is that these are figures for the financial year, and represent fees relating to that year rather than the total amount of fees per student enrolled. For example, if a student started in January (an increasingly common start point for some courses at some institutions) you will only see the proportion of fees that had been paid by 31 July shown in the accounts. If you teach a lot of nursing students who start at non-traditional times of the year this will have a notable impact, as will a failure to recruit as many international students as you had hoped to do in January 2024 (though this will also show up in next year’s accounts).

    And it is also worth bearing in mind that income from fees paid with respect to students registered at the provider but studying somewhere else via an academic partnership, or involved in a franchise arrangement (something that has seen a lot of growth in some providers) shows up in this budget line.

    Other movements

    Quite a number of providers have drawn down investments or made use of unrestricted reserves. This is very much as you would expect, these are very much “rainy day” provisions and even if it is not actually raining now the storm clouds are gathering. Using money like this is a big step though – you can only spend it once, and the decision to spend it needs to link to plans not to need to spend it in the near future. So even if your balance looks healthy, a shift like this speaks eloquently of the kinds of cost-saving measures (up to and including course closures and staff redundancy) that you may currently see happening around you.

    Similarly, a provider may choose to sell assets – usually buildings – that it does not have an immediate or future use for. The costs of running and maintaining a building can quickly add up – a decision to sell releases the capital and can also cut running costs. Other providers choose to hang on to buildings (perhaps as assets that can be sold in future) but drastically cut maintenance and running costs for this reason. Again, you can (of course) only sell a building once, and a longer term maintenance pause can make it very expensive to put your estates back into use. I should note that the overall condition of university estates is not great and is declining (as you can read in the AUDE Estates Management Report) , precisely because providers have already started doing stuff like this. If the heating seems to be struggling, if the window doesn’t open, that’s why.

    In some cases we have seen decisions to pause capital programmes – not borrowing money and not building buildings as was previously planned. Here, the university makes an on-paper saving equivalent to the cost of finance if it was going to borrow money, or frees up reserves for other uses if it was using its own funds. Capital programmes don’t just include buildings – perhaps investment in software (the kind of big enterprise systems that make it possible to run your university) has been paused, and you are left struggling with outdated or unsuitable finance, admissions, or student record systems.

    Where we are talking about pausing building programmes it is important to remember that these exist to facilitate expansion or strategic plans for growth. The “shiny new building” is often perceived as a vice chancellor’s vanity project – in reality that new business school and the recruitment it makes possible may represent the university’s best hope of growing home fee income faster than inflation.

    What’s next?

    We see financial information substantially after the financial year ends – and for most larger providers this comes alongside the submission of an annual financial return to their regulator. We know for instance that the Office for Students is now looking at ways of getting in year data in areas where it has significant concerns, but financial data (by dint of it being checked carefully and audited) is generally historic in nature.

    For this reason what is happening on your campus right now is something that only your finance department has any hope of understanding, and there may be unexpected pressures currently driving strategy that are not shown (or even hinted at) in last years’ accounts. Your colleagues in finance and planning teams are working hard to forecast the end of year result, to calculate the KFIs (Key Financial Indicators) that others rely on, and to plan for the issues that could arise in the 2025 audit. The finance business partners or faculty accountants – or whatever name they have where you work – will be gathering information, exploring and explaining scenarios, and anticipating pressures that may require a change in financial strategy.

    The data I have presented here is drawn from published accounts – the data submitted to regulators that eventually ends up on HESA may be modified and resubmitted as understanding and situations change – for this reason come the early summer figures might look very different than what are presented here (I should also add I have transcribed these by hand – for which service you should absolutely buy me a pint) – so although I have done my best I may have made transcription errors which I will gladly and speedily correct.

    However scary your university accounts may be, I would caution that the next set (2024–25 financial year) will be even more scary. The point at which the home undergraduate fee increase in England kicks in for those eligible to charge it (2025–26) feels a long way off, and we have the rise in National Insurance Contributions (due April 2025) to contend with before then.

    There are a small but significant number of large providers looking at an unplanned deficit for 2024–25, as you might expect they will already be in contact with their regulator and their bank. Stay safe out there.

    If you are interested in institutional finances, I must insist that you read the superb BUFDG publication “Understanding University Finance” – it is both the most readable and the most comprehensive explanation of annual university accounts you will find.

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