How to get the sector through the next year

A thought experiment: on Friday 5 July Bridget Phillipson calls Matt Western into her new office.

She’s well aware of the financial peril universities are in – and she’s no desire to see a large university fail on her watch. To that end she gives Western a capital budget – three-quarters of a billion pounds.

It needs to be spent quickly – before the next spending review settlement is announced. And it needs to ensure that the new government is not embarrassed by a disorderly market exit while a more thorough review of higher education funding is carried out.

What should he do?

Option 1 – fee cap increase

Universities have been lobbying hard for an increase in full-time undergraduate tuition fees. Doing this would go some way to making undergraduate provision for home students revenue neutral rather than loss making in most cases. Because fees are paid per student, providers with more home undergraduates would receive more support. Because it attaches to an existing system of allocation

The political optics of this would be challenging. A fee raise would give the impression that the costs are being covered with loan repayments made by young people. Making the fee system more progressive (ensuring well-to-do graduates paid more) would go some way to addressing this issue, but the counterintuitive design of our funding system means that this would involve a return to real interest rates (let’s go for RPI plus three per cent), which would be another difficult sell – although you could mollify this with a return to 30 rather than 40 year repayment terms and stepped marginal payments (ranging from 3 per cent to 9 per cent depending on income).

Your three-quarters of a billion pounds would buy you (in initial outlay terms) a fee limit raised by about £600 (with the cap set at £9,850, keeping you below five figures). Using the IFS model with the above parameters for fee loan amount and repayment (otherwise sticking to the standard assumptions) this plan would actually lower the RAB charge while raising the share of loans that are written off. Even though Western may or may not want to make longer term choices given our imagined review, this has to make for a tempting option.

However, the earliest you could realistically raise fee limits is the 2025-26 academic year – the majority of undergraduates have already applied for a university place and fee loan support under current rules. The promise of funding to come for the sector would help providers, but there is a risk involved in not providing any additional support for 2024-25. OfS tells us that even the eternally optimistic provider forecasts see this as a year with even more precarity than the current one.

Option 2 – one off pro-rata grant allocation

Three quarters of a billion pounds would also buy you an increase in OfS funding grants made to providers (per student FTE) of around £600 (rising to £1,750 from a 2023 level of £1,150). The two big advantages here is that it would not be seen as being paid for by young graduates, and a precedent for one-off allocations already exists (during the pandemic, Research England doubled the QR allocation to partially compensate research intensive universities for the loss of international fee income).

This is a very blunt instrument used to address a blunt trauma. It is probably not the most efficient way to use this funding, and much of it would go to large providers that are already financially stable. There’s no control over what it could be used for – but the one thing it couldn’t be used for is long term planning (taking on staff on permanent contracts, for instance).

The downside would be that this plan offers temporary relief only – it would help universities cover the worst of the plight that they are in, but doesn’t offer anything sustainable for the longer term. The sector would have to hope that a wider review would do something more favourable.

Option 3 – student maintenance increase

Providers are struggling, but so are students. The system of undergraduate maintenance loans is antiquated, with parental income thresholds for borrowing unchanged for more than a decade. There are convincing suggestions that this, coupled with a sharp rise in the cost of living, is putting applicants off applying to university and forcing many of those already studying to leave.

There’s a bunch of options here. Firstly you could offer all current and prospective students a non-repayable maintenance grant – which works out at about £650 each (based on everyone that was receiving a maintenance loan in 2022-23). You could skew that by parental income to help target support to those who most need it – if you use the current model to do this (as per the IFS model) you could have a maximum means-tested grant of around £1,000.

It is very difficult to satisfactorily model the cost of increasing the minimum parental contribution threshold (thus allowing more people to take up the maximum loan). The IFS model allows you to take it up quite high before you hit a £750m outlay, even though it assumes 95 per cent take up of the maximum loan amount available. Arguably this is a better bet (though a more difficult sell) than increasing the maximum loan available – you can boost this by about £900 before you hit our outlay limit. This would raise the RAB charge only a tiny amount too.

Supporting students is unquestionably the right thing to do, but – although there will be some impact from improved retention and recruitment – it does nothing to stop universities from closing. So, regretfully, this isn’t really an option. I include it just to remind people how surprisingly inexpensive it would be to fix the maintenance loan system given the political will to do so.

Option 4 – targeted support

So we iterate back to option 2, but with the intention of making it more effective at supporting the bits of the sector that really need the money. The most straightforward way to do this is to target support where it is most needed to protect the interests of students – and, to be clear, this is the actual interests of current and future students in completing their chosen course at their chosen provider.

The Transparent Approach to Costing (TRAC) data isn’t really up for giving us precise costs of delivery per course (or even subject) and provider on anything other than an aggregate basis. We could – as KPMG did during the Augar review – use and improve these nominal figures to identify where particular providers are making a loss on home undergraduate delivery that we could make good. To say this would be contentious would be an understatement: it is precisely providers with healthier finances that are more likely to be able to run home UG provision at a long term loss. Those who are genuinely struggling are likely to have already cut their cloth accordingly.

At a layer of abstraction up we could look at this either by subject (using the TRAC-derived price groups to tailor support to subjects deemed to have a high cost) or provider (using annual financial return (AFR) data to identify for support providers who are particularly struggling).

For subjects, the hazard is that the price groups already build in a level of political desirability – Gavin Williamson famously decided (there is really no other word) that media and arts courses were worthy of less support, however much they actually cost to run. Reappraising price groups would therefore be a required precursor to this kind of allocation – either to reset them to reflect costs only, or implement a new calculus of desirability.

Looking solely at provider needs presents a moral hazard – there are some institutions that have used post-2017 freedoms to borrow heavily in order to expand (itself an actual government policy, used to drive down capital allocations) and the financial mess some of these now find themselves in is the result. Others may simply be inefficient or badly run. In either case chucking public money directly at failing businesses is a difficult argument to make, even if the endpoint is a sustainable system of higher education.

There might be a case for a bidding round – providers could propose actions that they would take to secure future stability, and this would be assessed by a panel of experts. Bidding rounds are unpopular, as they add burden without the guarantee of income, and frankly I would not like to be on that panel. The old HEFCE used to do funding allocations linked to the assessment of institutional strategies: using that method would be a kind of halfway house in between a competition and a restructuring fund.

Which is our other option – keep the £750m in your pocket and use it to intervene where providers are on the point of closure as part of a package of assistance and advice, in a similar way to the system that was on offer during Covid-19. This gives you the assurance that money is being used where it is most affected, while allowing for the assurance that it is well spent with an eye to future sustainability and the student interest. What this doesn’t allow for is any support for wider sustainability, or anything to address the kind of piecemeal cuts that have a detrimental effect on the student experience.

There are no good options

A sticking plaster is a way of holding a problem at bay while you put a proper mitigation in place. Anything that needs to be done cheaply and quickly is likely to present problems if it stays in place for too long.

It’s clear that higher education finance needs radical reform – in the interests of students, the nation, and the sector – and it is sensible to think about emergency measures to hold things together while plans are made and implemented. Nothing is going to be perfect, nothing is going to be completely effective.

On the other side of Bridget Phillipson’s desk, Matt Western knows this. He also knows that whatever decision he makes regarding this unexpected windfall will be picked to pieces – not least by me on Wonkhe. But any measure of support, however flawed, will be welcomed. And not just for the extra money injected into struggling providers, for the message that the government is no longer hell bent on seeing a university fail.