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Follow the money. UPDATE: The illusion of a graduate levy on employers


A report by Johnny Rich FAIRER FUNDING The case for a graduate levy published today by the Higher Education Policy Institute (HEPI) has caused quite a stir in the media. Its central thesis is that student fees can be abolished and replaced directly by a levy on employers that hire graduates. Instead of students repaying loans “A ‘graduate levy’ means the graduate no longer pays. Rather than the current repayments being collected alongside the employee’s National Insurance Contributions, the levy would be paid alongside the employer’s contributions.”

The HEPI offering is a shorter version of a full proposal that is published on the Johnny Rich Blog. It adds some more useful detail and should be read in its entirety. On the surface, it appears as an attractive proposal and has generated a considerable amount of debate. Although not discussed, it adds a potential option for the Labour Party to consider for their bold National Education Service plans. Abolishing student fees and loans would be expensive and the report provides an apparently attractive ‘get out’ route. Indeed, the assumption is that such a proposal might have been made to the Labour Party in its consultation earlier this year.

Rearranging the deck chairs. Who pays?

However, there are dangers that are not fully explored. Some will see the proposals as dangerously naïve and they could have a point. The idea that a graduate will not pay in the end is a false one. Someone has to pay and a levy might be expected to be spread across shareholders and customers of whatever the employer does in our society. However, it is most likely to result in lower salaries for graduates. Indeed this is the argument made.

Depending on how the employer chooses to absorb the levy, their costs may be no more than the current funding arrangements. Consider a graduate on a salary of £26,000: under current arrangements, their loan repayments amount to £90 over the year (9% of earnings over £25,000) and, before other deductions, their salary is £25,910. Under the graduate levy, the employer can choose to offer the same job at a salary of £25,910. Assuming they still employ a graduate, their outgoings will be the same £26,000 as previously because they are paying the graduate levy on top of the salary. It has cost the employer not a penny more and the graduate takes home not a penny less, but the graduate has no tuition fee debt. (My note: No but they pay back in lower salaries for the rest of their working lives instead) Of course, the employer could choose to employ a non-graduate and save £90. That is no different from now: employers often do employ non-graduates at lower rates, but the graduate earnings premium, for which evidence remains clear, demonstrates that employers do consider it worth paying more.”

It might seem like it is offering an illusion of things getting better whilst 'rearranging the deck chairs'. The assumption is that the employer continues to employ graduates, but that this will be on the back of supressed pay as a result of the levy. This is a very big assumption and as pay levels rise it would reach a point when an employer might ditch the more costly older graduate for a younger one. Furthermore, many employers increasingly employ graduates as they come onto the market when a graduate is not needed. Later the report goes onto ditch the idea of a high threshold of £25,000pa before paying with; “introducing the graduate levy at lower than the current repayment threshold (at £21,000, say)”. Add the assertion that there will be no time limit on the levy and it diverges greatly from the current student loan system; “Together with (removing or lengthening) the time limit, a graduate levy scheme could collect funds more effectively to the tune of billions every year.”

Even more radical and dangerous is the proposition that the government loans money up front to the universities instead of to the student.

“If we start from the principle that the current system is assumed to be affordable, then it should be equally affordable for the government to continue to foot the bill for English higher education by lending direct (ly) to the higher education institutions rather than lending to the students. The higher education institutions would use funds they receive from the graduate levy to repay those loans on the same terms as students repay them now – ie. when graduates earn over the threshold, the higher education institutions pay an equivalent sum to the Treasury.”

Except it is proposed that the threshold for a student’s employer is lower than the £25,000pa for university repayments. This clearly not the same. If it was the same there would also be an APR cost to consider with uncertain repayments over a long time. This effectively transfers the burden from the state to individual institutions and introduces the concept of decentralising and ‘privatising’ the tax revenue system. This would destabilise university planning in the longer term when they are crying out for more stability to fulfil their role. The plan is for the funds retrieved via the levy to be paid directly to the institution that the graduate came from. “As generations of graduates start creating income for universities, the Treasury can phase out lending”. It leads to the likelihood of universities trying to sell their graduates in the market to get a return and avoid long term interest costs. In turn, many institutions will avoid some courses that yield a poor return. The proposal does seek to protect many degree options in a complex manner through government subsidy. But the perceived need for this ‘backstop’ illustrates the inherent flaws in the basic argument. The knock on effects of a market in students as a commodity would be profound. There are many possibilities, including ‘cosy’ relationships between some employers and institutions emerging. I shudder to think what the employment contracts in an unplanned deregulated system might look like. If I were an employer seeking graduates, I would look overseas and avoid the hassle.

The simplest way might be the best.

The simplest way to pay for education at all levels is for the tax system to take account of additional earnings in a progressive environment. If graduates earn more they pay more anyway. Introducing a graduate tax to account for the additional earnings the education brings should be part of a reform of the current progressive taxation system and is simpler and more transparent.

The proposal does not refer to the Dearing Report of 1997, ‘Higher Education in the learning society’, but might well have used that as a starting point instead of the Browne Report that has led to the current mess. The Dearing report is very long (466 pages), well-crafted and considered. It is also comprehensive and ground breaking as it opened the door to sharing the contribution between the various stakeholders and introducing partial student contributions or ‘fees’. The role of employers is acknowledged in a global context. But it falls short of a levy or taxation on them. Increasing corporation tax for companies employing graduates, so that they pay for part of the training, would be a simple move that spreads the burden wider. The Dearing recommendation 71: “We recommend to the Government that, over the long term, public spending on higher education should increase with the growth in Gross Domestic Product.” Should be an additional consideration. However, the projected recession that will accompany any BREXIT scenario will put a dampener on this for sure.

A call for a more comprehensive shakeup.

The value of the ‘Fairer Funding Report’ lies in its ability to generate debate. It has succeeded on that front. But its proposals are dangerous. Everything in the economy is interconnected and it adjusts in response to the various pulls and pushes that government might exert. Government should not have thrown money at universities via student fees and loans in an unplanned way without a cap on numbers. Equally risky is sending the same amount as loans to universities directly to feed a graduate market. The likely outcome is a sudden contraction in university provision that is also unplanned. 

The full proposal acknowledges that the Office for National Statistics has yet to report its findings from its review the treatment of student loans in the UK government’s accounts. This is due to emerge on 17th December. The honest outcome would be to acknowledge that the government has incurred massive costs up front to date and with a poor return likely. If that is the case, then a major change will be needed as government forecasts look even bleaker in the run up to BREXIT.

University income and planning are very varied and complex as illustrated below in the earlier TEFS Blog ‘Follow the money’. The solution to ensuring stability and funding security in the long run is not simple. Anyone inside a university will concur and it would be foolhardy for an individual to try to unravel it alone. Many different skills and experts will be needed to mend the damage done.

There is now an urgent need for a comprehensive review of all aspects of university finance and how it interacts with the wider UK and global economy. Student fees are simply a part of this wider remit. Tinkering with them in isolation is not sensible at this stage.

Earlier Blog from Friday 23rd November 2018.

A report from the Higher Education Policy Institute (HEPI) this week ,‘Where do student fees really go? Following the pound’, considered how much information our universities should divulge to students about where their fee money goes. It was certainly illuminating but raised some concerns that I suspect many universities will resist. The headline from the BBC was “Half of university tuition fees spent on teaching”. This coincided with House of Commons Committee of Public Accounts report on the ‘Sale of student loans’ that bemoaned the lack of transparency there also. Simply put, there are many commercial interests keen to acquire the loan book at a cut price but these were not identified because “it is very commercially sensitive information”. It will be interesting to see who will profit in the end.

Earlier in the week the chair of the TEF review was also announced. Thus in one week we have serious consideration of where the money really goes and a review of how much value for money it represents. This embeds the ‘provider’ customer relationship into the education system in a combative manner that may well be regretted by all sides except perhaps those that stand to profit.

Shining a light into the cave.

The HEPI report was authored by its director Nick Hillman with help from a former Student Union CEO and two summer internship students from Oxford University. It appears to arise from some frustration regarding the recalcitrance of universities in yielding to requests about where the money goes. The forward notes that:

“When arguing for more transparency on the uses of student fees in front of university finance directors and other staff, I have often met two unsatisfactory and contradictory responses”.

The main responses cited are somewhat puny; that the financial details are already published and that it is too ‘complicated’ anyway.

From my perspective, as a former senior-level  ‘insider’ in a Russell Group university, I can concur that this frustration from HEPI is entirely justified. The stock response of some universities that they already publish accounts has been around as long as the ‘ivory towers’ have existed. The HEPI report has shone a light onto the back wall of a dark cavern. However, it has yet to explore the darker recesses of the whole university financial ‘cave system’.

The report will come as no surprise to those working in universities, but the public might find it puzzling. It is entirely necessary to cover ‘overheads’ on top of paying lecturers. This happens whenever anyone is employed as a researcher on a contract and is the equivalent of a shopkeeper paying council tax and passing the costs onto the customer. One recommendation from HEPI is that universities might refer to ‘student fees’ rather than ‘tuition fees’. This is indeed a sensible suggestion. But more important would be imposing a clear definition of what these terms mean. Many institutions might be alarmed by another recommendation that “Where feasible, financial reporting requirements for institutions should be harmonised with the sort of financial information that is of value to students and prospective students.” This move would be essential if students are to gain any insight into the costs of their preferred choices. It would also change priorities and behaviours of what are likely to be very reluctant universities.

The teaching and research costs are combined.

Again, it comes as no surprise that many universities consolidate staff costs as combined teaching and research. This is a particularly dark cavern in the cave system. But approached carefully, it can be explored. Although the majority of students are seeking more information, it might well be the case that they will accept that their lecturers are paid to do both research and teaching. This would seem a sensible expectation. A student aspiring to do well might expect to be taught by those who are leading in their research field. However, a problem arises when they fail to see very much of the professors that lead the research. In science areas, it is common to find that some are highly paid but not contracted to teach. Their main role is to acquire as much money in grants and produce output for the Research Excellence Framework or REF. Indeed, this is the quickest route to promotion with teaching sometimes trivialised in the process. Meanwhile many institutions are hiring less experienced staff to do most of the teaching on short-term contracts. Thus, it might be reasonable to assume that the actual cost of tuition is very much lower than reported.

What the FEC? The role of full economic costing.

Another HEPI recommendation is that “Ministers should consider new income streams for higher education institutions to cover the costs of valuable work that proves difficult to justify funding from student fees”.

However, this is already the case in many instances. Indeed this partially explains how the proportion of income from student fees for a university can vary greatly. For Cambridge it is 15% whilst elsewhere it is often over 80%.

Up to 2005, an additional 40% was added to competitive Research Council Grants for universities to cover a range of overheads. The EU grants provided much lower overheads that pressed institutions greatly. This was because the sums were often not enough to meet real overheads and commercial research contracts often charged over 100% of the cost of the work done. From 2005 a new ‘Full Economic Costing’ (FEC) methodology was introduced. The meant that any overhead costs were calculated more accurately. This included the salary of the lecturer or professor based on the proportion of time spent on a project. Prior to 2005, I calculated that I was bringing in around 60% of my salary as grant overheads. However, this supported a sizeable research team and was at the expense of a very demanding workload associated with the group. Most staff simply cannot sustain such pressure for very long. After 2005, it became clear that only between 5-10% of time could be included as justified in each project grant. To be funded as ‘research only’, I would have needed to routinely bring in over £1.2m in grant funding per year. I only approached this level a few times. This was almost technically impossible to achieve over time or sustain if reached. The pressures associated are immense and bring with them long working hours; usually well above 60 hours per week. Yet so called ‘star’ researchers are hired as ‘research only’ despite not coming anywhere near this income position. They are there for the REF returns.

Then there is the Research Council's FEC ‘sting in the tail’.

“All Research Organisations (ROs) should indicate the full economic costs in their grant proposals. Research Councils then pay a fixed percentage (80% for most fund headings) of this sum, with the balance expected to be funded from the ROs own funding streams.

The HEPI report rightly indicates that universities should be able to differentiate costs between teaching and research by deploying the ‘Transparent Approach to Costing’ (TRAC) methodology to calculate true overheads. Indeed, ostensibly it could determine how much time is devoted to teaching or research by individual staff. However, it also covers time in the ever increasing administrative roles. Furthermore, the Time Allocation System (TAS), that is mandatory under TRAC, is a self-reporting system in most institutions whereby staff indicate the percentage of time devoted to various tasks three time per year. The accuracy of this might be looked at again. I calculated my percentage of time based upon diary entries and can vouch for its accuracy. Others may not have been so diligent. But a percentage of what? This was never defined adequately. For teaching, I was entering it as a percentage of between 60 and 70 hours work per week. What is more valuable is the total number of hours teaching. It would be an unusual university department that did not have this data; usually on the form of a ‘work allocation model or suchlike. This would reveal the true situation and be verifiable.

Conclusion: Going back into the cave.

The situation is quite absurd and in need of more realistic reform across the board. The whole funding ‘model’ for universities in the UK is a mash up of byzantine complexity hidden in a cave system and  under the veil of ‘autonomy’. The Augar review is considering appropriate fees and the possibility of lowering them. The information in the HEPI report will not doubt strengthen his resolve. Augar is hopefully taking advice from scientists about how they are funded and will have a fuller picture of the challenges as a result. But looking at funding streams in isolation is in fact the root of many of the existing problems. There should be a more comprehensive review of where all of the money goes and the HEPI report has partially shown how this might be done. The students are calling for more information and the should expect to see the staff they are paying for.

TEF and poacher turned game keeper?

The review of TEF will be led by Dame Shirley Pearce (Oxford University Graduate, Clinical Psychologist and former VC of Loughborough University) and she is certainly well versed in the wily ways of universities. However, some might see a conflict with regards to true independence. Based upon her background, it is hoped that she will see the need for scientists on the team and that they consider the remit of TEF from 2018 that “The assessment process will explicitly take into account outcomes for disadvantaged groups.

Mike Larkin, retired from Queen's University Belfast after 37 years teaching Microbiology, Biochemistry and Genetics.


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