IEA: Reform university funding to incentivise education, not recruitment

The Office for Students (OfS) has warned that nearly three-quarters of higher education providers could be operating at a loss by 2025-26. Outcomes for graduates are deteriorating rapidly, with the average graduate taking 10 to 20 years to recover the costs of attending university. Meanwhile, the student loan system costs taxpayers around £10 billion annually 

In a new IEA discussion paper published today, 'Shares in Students', Peter Ainsworth sets out bold policy proposals to address these issues and position the UK as a global leader in higher education. 

A New Funding Model 

Ainsworth argues for a fundamental shift in how universities are funded. Currently, universities are paid for recruiting students, not for enhancing their prospects. He proposes a model where universities share in their graduates' financial success, creating incentives for effective education.  

The cap on tuition fees should be abolished, with the government loan amount frozen. Universities would charge fees based on market demand, with any excess over the government loan financed through income-contingent agreements issued by the institution, not the state. Under this model, students would pay nothing upfront but repay a share of their income after graduation, tying universities' financial success directly to their graduates' career outcomes. 

Unlike the current system, these loans would be funded by universities or their investors, not taxpayers. This would align university revenues with graduate employability and eliminate the current incentive to prioritise recruitment over quality education. Taxpayers would no longer bear the financial burden of underperforming courses and institutions. 

Freeing Academics to Innovate 

Ainsworth also calls for the abolition of course content regulations. With universities incentivised to deliver effective education, regulation becomes redundant. Academics, as experts in their fields, would have the freedom to design courses that best prepare students for career success, reducing red-tape and costs and fostering innovation. 

Universities as Businesses 

Following the government's decision to charge VAT on private school fees, Ainsworth questions whether universities should continue to operate as charities. With the majority of their income derived from the sale of services, universities could transition to business status, freeing them from charity regulations and unlocking significant value. Recognising the public benefit purpose of university assets, the state could become owner and shareholder. 

Listing universities on the London Stock Exchange, itself in need of new business, could raise of the order of £100 billion for the Exchequer.  

Higher education already contributes 2% to the UK's GDP, supports 500,000 jobs, and generates £10 billion annually from international students. However, the current funding model and regulatory framework jeopardises the sector's sustainability, fails to adequately support students, and imposes significant costs on taxpayers. 

Ainsworth argues that his proposed reforms would allow universities to grow, improve offerings for students, and position the UK as the world leader in higher education. 

Peter Ainsworth said: 

"The crisis in higher education is hurting everybody: 70% of universities are set to lose money next year, the value of a degree is collapsing, with the graduate premium down by £1,500 to a mere £6,500, while taxpayers are on the hook for billions in unpaid loans. The state-funded system, which pays universities for recruitment but not for a value-added education, has reached the end of the road. 

"The only sustainable path forward is to recreate the success of the medieval apprenticeship system by allowing universities to set their own tuition fees but on condition that they grant income-linked loans so that their success is tied to that of their students. With interests thus aligned, we will promote the UK to No. 1 in higher education and become the university of the world." 

ENDS

Notes to Editors

• Shares in Students can be accessed here.
• You can read Peter Ainsworth's other posts for the IEA here.

Graduate Payback Period: 

• The graduate premium (average earnings gain relative to non-graduates) has fallen to £6,500 in 2023, down from £8,000 in 2022.
• After tax (£1,300) and National Insurance (£780), the net gain is just £4,420 annually.
• With an average student debt of £43,700 and three years of lost earnings (c. £65,000), it takes 10-20 years for graduates to recover the costs of attending university.
• For graduates living in high-cost cities, the payback period could be even longer. 

Economic Potential of Reform: 

• Transitioning universities to business status and listing them on the London Stock Exchange could raise £100-200 billion for the Exchequer.
• Total net assets of the higher education sector (2021): £53 billion.
• Estimated sector valuation based on FTSE 100 price-to-book ratio: £95.4 billion.
• Additional revenue from business rates: £3.6 billion annually (present value: £70 billion).
• Savings from eliminating loan losses: c £40 billion.