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

1. Higher Education Funding Policy: who wins and who loses? Lorraine Dearden Emla Fitzsimons Alissa Goodman Greg Kaplan 18th March 2005

2. Outline of presentation • What are the reforms to Higher Education (HE) funding proposed by Labour, the Conservatives and the Liberal Democrats? • How would students be affected by the proposed reforms? • A look at lifetime earnings profiles for graduates and non-graduates • How would graduates be affected by the proposed reforms? • What would the reforms cost and who would pay? • What do the reforms imply for university funding?

3. 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.

4. The proposed reforms Tuition Costs

5. The proposed reforms Tuition Costs

6. The proposed reforms Tuition Costs

7. The proposed reforms Tuition Costs

8. The proposed reforms (contd.) Maintenance Support

9. The proposed reforms (contd.) Maintenance Support

10. The proposed reforms (contd.) Maintenance Support

11. The proposed reforms (contd.) Maintenance Support

12. 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

13. 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?

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

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

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

17. 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 Conditions

18. 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 Conditions

19. 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 Conditions

20. 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 Conservativesystem • 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

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

22. Debt levels on graduation Estimated so as to provide student with same standard of living in university under all three systems

23. Debt levels on graduation Estimated so as to provide student with same standard of living in university under all three systems

24. Debt levels on graduation Estimated so as to provide student with same standard of living in university under all three systems

25. Debt levels on graduation Estimated so as to provide student with same standard of living in university under all three systems

26. How Much More Do Graduates Earn Over Their Lifetimes?

27. 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

28. New Approach • Explicitly account for: • Spells out of work • Earnings mobility • Simulation based approach • Labour Force Survey – wages • British Household Panel Survey – employment

29. A Distribution of Outcomes

30. A Distribution of Outcomes

31. A Distribution of Outcomes – no mobility, full employment

32. Median Graduate Advantage

33. Median Graduate Advantage

34. Median Graduate Advantage

35. Median Graduate Advantage

36. Median Graduate Advantage

37. Median Graduate Advantage

38. Median Graduate Advantage

39. 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

40. What do the proposed reforms mean for graduates?

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

42. 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

43. Repayments • Under all systems, graduates on same salary make identical minimum repayments

44. Repayments • Under all systems, graduates on same salary make identical minimum repayments • Minimum does not vary by debt level or interest rate & all debt written off after 25 years

45. Repayments • Under all systems, graduates on same salary 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

46. Impact on graduates • Huge advantages from estimating the full distribution of graduate lifetime earnings paths

47. 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

48. 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

49. Impact on ALL graduates

50. Taxpayer Subsidy on Loan • Under Labour and Liberal Democrats – zero real interest rate on loans