Higher Education Funding Policy: who wins and who loses? Lorraine Dearden Emla Fitzsimons

Higher Education Funding Policy:

who wins and who loses?

Lorraine Dearden

Emla Fitzsimons

Alissa Goodman

Greg Kaplan

18th March 2005

Outline of presentation

1. What are the reforms to Higher Education (HE) funding proposed by Labour, the Conservatives and the Liberal Democrats?

2. How would students be affected by the proposed reforms?

3. A look at lifetime earnings profiles for graduates and non-graduates

4. How would graduates be affected by the proposed reforms?

5. What would the reforms cost and who would pay?

6. What do the reforms imply for university funding?

2003-04 system

• Upfront tuition fees of £1,200 p.a.• Full or partial fee exemptions for poorest students

• Zero grants• Means-tested maintenance loans of up to £4,305 p.a.

The proposed reforms

Tuition Costs

Labour Conservatives Liberal

Democrats

Tuition Costs

Democrats

Fees - Upfront None None None

Tuition Costs

Democrats

- Deferred £0-£3,000 p.a. None None

Tuition Costs

Democrats

- Deferred £0-£3,000 p.a. None None

- Exemptions None N/A N/A

The proposed reforms (contd.)Maintenance Support

Democrats

Loans £3,305 - £4,405 p.a.

Means-tested

£5,000 p.a.

Not means-tested

£3,225 - £4,300 p.a.

Means-tested

Democrats

Loans £3,305 - £4,405 p.a.

Means-tested

£5,000 p.a.

Not means-tested

£3,225 - £4,300 p.a.

Means-tested

Grants £0 - £2,700 p.a.

Means-tested

£0 - £1,500 p.a.

Means-tested

£0 - £2,000 p.a.

Means-tested

Democrats

Loans £3,305 - £4,405 p.a.

Means-tested

£5,000 p.a.

Not means-tested

£3,225 - £4,300 p.a.

Means-tested

Grants £0 - £2,700 p.a.

Means-tested

£0 - £1,500 p.a.

Means-tested

£0 - £2,000 p.a.

Means-tested

Bursaries Minimum £300 p.a. if fees are

£3,000 p.a.

Means-tested None None

What the proposed reforms mean for

student living standards

This largely depends on take-up of debt by students

Tuition fees should not affect student living standards, so maintenance grants and loans determine how well off a student will be

This is because

• Under Labour system, fee loans would cover full tuition costs

• Under Conservative and Liberal Democrat systems, no tuition costs

What the proposed reforms mean for student living standards (contd.)

Just how far would maintenance support

- maintenance loans, grants and possibly bursaries -

go towards providing students with basic standard of living (we consider NUS benchmark of £6,890 p.a.) under all three systems?

Student Finances under Labour proposals,assuming maximum debt take-up

01,0002,0003,0004,0005,0006,000

Parental income, £ p.a.

Maintenance Loan Grant Bursary NUS Shortfall

Student Finances under Conservative proposals,assuming maximum debt take-up

01,0002,0003,0004,0005,0006,000

Maintenance Loan Grant NUS Shortfall

Student Finances under Liberal Democrat proposals, assuming maximum debt take-up

01,0002,0003,0004,0005,0006,000

Debt take-up Just how likely is it that students would take out all available loans?

- It largely depends on the terms and conditions of debt repayment

Debt Repayment Terms and ConditionsLabour Conservatives Liberal

Democrats

Repayments 9% of income above

£13,925 p.a.

9% of income above

£13,925 p.a.

9% of income above

£13,925 p.a.

Democrats

£13,925 p.a.

9% of income above

£13,925 p.a.

9% of income above

£13,925 p.a.

Real interest rate 0% 4% - 5.5% 0%

Democrats

£13,925 p.a.

9% of income above

£13,925 p.a.

9% of income above

£13,925 p.a.

Real interest rate 0% 4% – 5.5% 0%

Debt forgiveness 25 years after graduation

25 years after graduation

Debt take-up (contd.)

• Under the Labour and Liberal Democrat systems• loans subsidised• this means that students would be well-advised to borrow the

maximum amount, regardless of whether they can obtain external sources of funding

• Under the Conservative system• loans carry a real interest rate• this means that students may be well-advised not to borrow the

maximum amount and to seek cheaper external sources of finance if possible

• we assume that a student under a Conservative system borrows the amount that would provide him/her (as far as possible) with the same standard of living in university as (s)he would obtain under a Labour system

Student Finances under Conservative proposals, equivalising maintenance support to Labour system

01,0002,0003,0004,0005,0006,000

Debt levels on graduationEstimated so as to provide student with same standard of living in

university under all three systems

Labour Conservatives Liberal Democrats

Student’s parental

income

Low(up to £15,970 p.a.)

£19,340 £16,230 £12,340

income

Low(up to £15,970 p.a.)

£19,340 £16,230 £12,340

Middle(around £25,000 p.a.)

£19,340 £14,580 £12,340

income

Low(up to £15,970 p.a.)

£19,340 £16,230 £12,340

£19,340 £14,580 £12,340

Upper middle(around £35,000 p.a.)

£21,440 £13,810 £11,910

income

Low(up to £15,970 p.a.)

£19,340 £16,230 £12,340

£19,340 £14,580 £12,340

Upper middle(around £35,000 p.a.)

£21,440 £13,810 £11,910

High(above £44,000 p.a.)

£18,670 £10,730 £9,250

How Much More Do Graduates Earn Over Their Lifetimes?

Conventional Approach

• Sample graduates only

• Ignores large variability in possible lifetime earnings paths

• Ignores fact that the value of a degree will be different for different people

Estimate the ENTIRE DISTRIBUTION of lifetime earnings paths

New Approach

• Explicitly account for:• Spells out of work• Earnings mobility

• Simulation based approach

• Labour Force Survey – wages• British Household Panel Survey – employment

A Distribution of Outcomes

0.000.010.020.030.040.050.060.070.08

Lifetime earnings in £2006-07

Graduate Males Non-graduate Males

A Distribution of Outcomes

Lifetime earnings in £ 2006-07

Graduate Females Non-graduate Females

A Distribution of Outcomes – no mobility, full employment

Lifetime earnings in £2006-07

Graduates All non-graduates

Median Graduate Advantage

Graduates

Non-graduates

Difference

Females

Graduates

Non-graduates

Difference

Males 1,112,000

Females

Graduates

Non-graduates

Difference

Males 1,112,000 787,000

Females

Graduates

Non-graduates

Difference

Males 1,112,000 787,000 325,000

Females

Graduates

Non-graduates

Difference

Males 1,112,000 787,000 325,000

Females 754,000

Graduates

Non-graduates

Difference

Males 1,112,000 787,000 325,000

Females 754,000 324,000

Graduates

Non-graduates

Difference

Males 1,112,000 787,000 325,000

Females 754,000 324,000 430,000

Not a sure thing…

MALES:• 15% of graduates earn less than £900,000• 18% of non-graduates earn more than

£900,000

FEMALES:• 15% of graduates earn less than £500,000• 16% of non-graduates earn more than

£500,000

What do the proposed reforms mean for graduates?

Introduction

• How graduates fare depends on:• lifetime earnings • graduation debt• interest rate and repayment conditions

Introduction

• How graduates fare depends on:• lifetime earnings • graduation debt• interest rate and repayment conditions

• Compare graduate outcomes assuming that students living standards at university same under all three systems

Repayments• Under all systems, graduates on same salary

make identical minimum repayments

make identical minimum repayments • Minimum does not vary by debt level or

interest rate & all debt written off after 25 years

make identical minimum repayments • Minimum does not vary by debt level or

interest rate & all debt written off after 25 years

• Students making repayments reduce debt:• always under Labour’s and Liberal

Democrat’s scheme• only if repayment greater than interest

under Conservatives

Impact on graduates• Huge advantages from estimating the full

distribution of graduate lifetime earnings paths

• Show the average outcome, plus the dispersion around a particular outcome

• Also choose sub-samples of interest:• women who take more than 5 years out of

the labour market• low and high earners

Impact on ALL graduates

Taxpayer Subsidy on Loan

• Under Labour and Liberal Democrats – zero real interest rate on loans

• Cost of government borrowing is not zero – therefore taxpayer subsidy in providing these loans

• Under Conservative scheme NO taxpayer subsidy on loans as administered by banks

How much is the subsidy?

• Under Labour ranges from:• 27.4% to 29.1% for men• 41.2% to 45.7% for women

• Under Liberal Democrats ranges from:• 21.0 % to 23.3 % for men• 26.3 % to 30.9% for women

• Difference is wholly due to larger graduate debt under Labour

Time to pay back loans

• For male & female graduates from low income families:

• shortest under Liberal Democrats• longest under Conservatives

• For male & female graduates from high income families:

• shortest under Liberal Democrats• longest under Labour

• For male & female graduates from high income families:

• shortest under Liberal Democrats• longest under Labour

• Least variability in repayment times:

• under Liberal Democrats for men• under Labour for women

Years to pay debt - Men

Low income family

High income family

Labour: 17.3

Conservatives 20.9

Liberal Democrats 13.3

Years to pay debt - Women

Low income family

High income family

Labour: 22.2

Conservatives 23.2

Proportion not paying back loans

• For male & female graduates from low income families:• shortest under Liberal Democrats• longest under Conservatives

Proportion not paying back loans

• For male & female graduates from low income families:• shortest under Liberal Democrats• longest under Conservatives

• For male & female graduates from high income families:• shortest under Liberal Democrats• longest under Labour

Proportion not paying off debt - Men

Low income family

High income family

Labour: 3.3% 3.1%

Conservatives 18.8% 2.9%

Liberal Democrats 1.3% 0.9%

Proportion not paying off debt - Women

Low income family

High income family

Labour: 58.1% 54.6%

Different types of graduates

• In report we look at implications of different policies for:• Higher earners and low earners• Women who spend more than 5 years out

of the labour market between ages of 22 and 46

• Graduates who have undertaken 5 year degree courses

Women who spend more than 5 years out of the labour market

Background

• In our sample, 21.9 per cent of women spend more than 5 years out of labour market between ages of 22 and 46

Background

• In our sample, 21.9 per cent of women spend more than 5 years out of labour market between ages of 22 and 46

• Of these women:• 60 per cent are in the bottom quintile of lifetime

earnings• 6.2 per cent are in the top quintile of lifetime

earnings• Average lifetime earnings £530,490 (£253,460)

Years to pay debt

Low income family

High income family

Labour: 23.4

Conservatives 23.9

Proportion not paying off debt

Low income family

High income family

Labour: 82.2% 80.9%

Outstanding Debt as % of total debt

Low income family

High income family

Labour: 42.4% 41.0%

What does this mean?

• High proportion of women in this group don’t pay off debt – even though some end up in highest quintiles- raises questions about 25 year debt write

What does this mean?

• High proportion of women in this group don’t pay off debt – even though some end up in highest quintiles- raises questions about 25 year debt write off

• Banks administering Conservative scheme potentially face severe adverse selection problems• 25 year debt write off and fixed minimum

repayments source of difficulties

Conclusions

• Impact of different parties’ policies vary across the earnings distribution

Conclusions

• Focussing on ‘example’ graduate or a ‘median’ graduate does not get close to telling the whole story

Conclusions

• Focussing on ‘example’ graduate or a ‘median’ graduate does not get close to telling the whole story

• Our analysis on graduates should help ensure that the implications of whatever system is in place after the election are more fully understood

How much do the reforms cost, and who would pay?

Alissa Goodman

Summary

• Reforms mean gainers under all 3 parties: • Universities • Students

• Who pays differs across parties

• Labour and Conservatives: • Graduates and taxpayers share the costs

• Liberal Democrats:• Taxpayers foot the entire bill

Taxpayers: public expenditure

Labour Conservative Lib Dem

Additional

England, teaching and student support

Additional £1.3 bn

Additional £1.3 bn £1.1 bn

Additional £1.3 bn £1.1 bn £2.2bn

Additional £1.3 bn £1.1 bn £2.2bnTotal HE

Total HE spending 2003-04 system: £6.3 bn

Additional £1.3 bn £1.1 bn £2.2bnTotal HE £7.6 bn £7.4 bn £8.5bn

Total HE spending 2003-04 system: £6.3 bn

Taxpayer costs: Labour

2006/07

New fee loans £800mNew maintenance loans £70mGrants £420mTotal £1.3 billion

Taxpayer costs: Conservatives

2006/07

Fee replacement +£1350mGift of Student Loan Book +£380mGrants +£420mLoan subsidies -£1030mTotal £1.1 billion

Taxpayer costs: Lib Dems

2006/07

Fee replacement +£1680mGrants +£560mTotal £2.2 billion

Who pays, and who gains?

• Payments are made to and/or from:• Taxpayers• Universities• Students• Graduates

All payments

Base Labour Cons Lib Dem

Taxpayers -6.3 -7.6 -7.4 -8.5

Universities

Students

Graduates

£ billion

All payments

Taxpayers -6.3 -7.6 -7.4 -8.5

Universities +5.8

Students

Graduates

£ billion

All payments

Taxpayers -6.3 -7.6 -7.4 -8.5

Universities +5.8

Students -0.5

Graduates

£ billion

All payments

Taxpayers -6.3 -7.6 -7.4 -8.5

Universities +5.8

Students -0.5

Graduates +1.0

£ billion

All payments

Taxpayers -6.3 -7.6 -7.4 -8.5

Universities +5.8 +6.9

Students -0.5

Graduates +1.0

£ billion

All payments

Taxpayers -6.3 -7.6 -7.4 -8.5

Students -0.5 +0.9

Graduates +1.0

£ billion

All payments

Taxpayers -6.3 -7.6 -7.4 -8.5

Students -0.5 +0.9

Graduates +1.0 -0.2

£ billion

All payments

Taxpayers -6.3 -7.6 -7.4 -8.5

Universities +5.8 +6.9 +7.0

Students -0.5 +0.9

Graduates +1.0 -0.2

£ billion

All payments

Taxpayers -6.3 -7.6 -7.4 -8.5

Students -0.5 +0.9 +0.4

Graduates +1.0 -0.2

£ billion

All payments

Taxpayers -6.3 -7.6 -7.4 -8.5

Students -0.5 +0.9 +0.4

Graduates +1.0 -0.2 0

£ billion

All payments

Taxpayers -6.3 -7.6 -7.4 -8.5

Universities +5.8 +6.9 +7.0 +7.0

Students -0.5 +0.9 +0.4

£ billion

All payments

Taxpayers -6.3 -7.6 -7.4 -8.5

Universities +5.8 +6.9 +7.0 +7.0

Students -0.5 +0.9 +0.4 +0.6

£ billion

All payments

Taxpayers -6.3 -7.6 -7.4 -8.5

Universities +5.8 +6.9 +7.0 +7.0

Students -0.5 +0.9 +0.4 +0.6

Graduates +1.0 -0.2 0 +1.0

£ billion

All payments: compared to 03/04

Labour Cons Lib Dem

Taxpayers

Students

Graduates

£ billion

Labour Cons Lib Dem

Taxpayers

Students +1.4 +0.9 +1.1

Graduates

£ billion

Labour Cons Lib Dem

Taxpayers -1.3

Students +1.4 +0.9 +1.1

Graduates -1.3

£ billion

Labour Cons Lib Dem

Taxpayers -1.3 -1.1

Students +1.4 +0.9 +1.1

Graduates -1.3 -1.0

£ billion

Labour Cons Lib Dem

Taxpayers -1.3 -1.1 -2.2

Students +1.4 +0.9 +1.1

Graduates -1.3 -1.0 0

£ billion

University funding

• Increase similar under all parties• Up to 30% real increase in per student

• Return to unit funding of early 90s

• Still below 1970s peak

University funding per student

10,00019

public, incl. Fees 2006-07

University funding per student

12,00019

historic series public, incl. Fees 2006-07

Conclusions

• University funding to rise under all parties

• Students will also gain

• Taxpayer contributions higher

• Labour and Conservatives: graduates pay too• Conservatives: market for loans• Labour: market for fees

Higher Education Funding Policy: who wins and who loses? Lorraine Dearden Emla Fitzsimons

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