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Two thirds of higher education institutions have chosen to fix their fees at the maximum level of £9,000 per year. This is not how it was meant to be: rather than solving a problem, the trend poses a financial challenge for the government, which is about to publish its high education white paper. Gareth Dent FRSA and Chief Executive of Open College of the Arts, argues that the underlying model needs to change.

I suspect that as he surveys the short-term outcome of his changes to higher education funding, David Willetts is a little disappointed.  The average loan to students in 2012 is going to be higher than forecast: the average fee is £8,750 but in modelling the proposals government economists assumed it would be £7,500. In the early years of roll out, this means higher than budgeted for public spending at a time of restraint in public spending. The obvious way to bring the equation back into balance with a higher average loan is to cap the numbers receiving loans even more tightly. So the market approach adopted by the government to fee setting runs into the familiar old constraints of command and control.

All of this could have been foreseen if the Minister of State for Universities and Science had just remembered a little of his economics from his own time as a student in higher education. In 1970, George Ackerlof in his The Market for Lemons, looked at the market for used cars, but the problem of asymmetric information that he found in that market is equally pressing for potential under-graduates today. Faced with uncertainty about the quality of higher education, and possibly confused about what dimensions of the experience and its subsequent impact on their labour market prospects to take into account, it is not surprising that people will take the level of fee as a signal of quality. As a result , university finance directors (who, as we all know, are more powerful than vice chancellors) unsurprisingly pushed to set the highest fee possible. Market competition did not act to drive down prices: it pushed them up.

So the government gets a spending problem in the short-term and students get a high-cost education – often unrelated to quality – with the payback lasting decades. This would not be a problem if higher education behaved like an expensive but highly effective vaccination: an intervention that sets a young person on the track towards life-time earnings above the average, with plenty of time to pay back. Yet there are at least two reasons to consider it a problem.

Firstly, estimates of the financial returns to the individual of higher education are necessarily retrospective. The gilded youth of Alan Bennett's The History Boys could look forward to high returns because there were proportionately so few of them. This change is more recent and more pronounced than many people realise: graduates made up 5% of employees in 1980 and more than 20% by 2005. It could be that high fees and uncertainty over the returns could drive us backwards, fixing one problem by creating another: that of under-investment in skills nationally.

Secondly, the returns to education do not only accrue to the individual; as the evidence included in Richard Layard Happiness shows, society benefits as secure people (in the labour market or in their sense of purpose, or both) put fewer demands on public spending on health services, housing and benefits. This, combined with longer working lives and the rate of change in technology and the organisation of work, means that it is reasonable to expect many of today's students to want to or to need to revisit higher education. Already over half of part-time students are over 30 and only two thirds of full-time under-graduates are between the age of18 and 21.

The current apparent equilibrium around a model of three years full-time at £9,000 a year is ill-suited to greater involvement in education over the lifetime of an individual because it deters repeat purchase. It is clear that the incentives for those who are prepared to risk moving away from the high-fee model need to be greater. There are powerful forces driving universities to want to stay with the high-cost full-time three-year model, not least the need to recover the investments they have made in their estate over the last decade.

But this model is not fit for purpose.  We need greater flexibility, so that students can choose to study at a time in their careers - and their lives – when they will gain the most academically, and when they have the maturity to take what is effectively a major investment decision. For some, that may be when they are 18, but for others it will be when they are considerably older.  We also need to recognise that not all subjects have to be studied from with the walls of an academic institution.  In this, technology – online collaboration, virtual lecture theatres, webinars – is underpinning fundamental changes in models of open learning.

Moving away from what we know will probably mean breaking with the dogma that good teaching only happens where there is excellence in research, a heretical thought for the Russell Group. But then changing incentives in markets is surely governments' stock-in-trade.

Gareth Dent began his career as an economist and civil servant, joining the newly created ‘university for industry’ in 1999, where he was responsible until 2005 for developing the learndirect national careers advice service.


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