Beware Chancellors bearing gifts

Mike Boxall, an expert in higher education at PA Consulting Group, reflects on the issue of student quotas raised this autumn

George Osborne’s announcement that student number controls are to be dropped from 2015 seems to have caught everyone by surprise – not least, judging by their responses, HEFCE, BIS and Universities UK. It would have been less surprising had the Chancellor announced the opposite, that quota caps would become more restrictive to limit the cost of student loan support. Inevitably, the announcement therefore prompts a number of important questions.

Firstly, why, given many other politically-pressing issues to worry about, did the Chancellor make his announcement now?

The reason Mr Osborne gave is that he wants to open access to the 60,000 qualified applicants who missed out on a degree place in the last admissions round. But this is difficult to reconcile with the number of unfilled places across the system in recent recruitment rounds, and the reduction in the number of courses offered through UCAS. After years of excess demand for HE, we are now facing a period of excess capacity.

Given anecdotal reports that the Treasury regards universities as ‘awash with cash’, perhaps the real motivation was a Ministerial wish to shake up the system. The change in quota controls will force unrestricted competition for home students, meaning that all HE providers will have to up their game. There could well be institutional casualties, which Ministers may think will ‘encourage the others’.

As many think student finance is already unsustainable, what is the fiscal logic in selling off the outstanding student loan book to pay for future generations?

At present, Government borrowing (real money) is passed to students via the Student Loans Company, which generates a long-term asset (future repayments) for the Government’s capital account. From this, a resource accounting and budgeting (RAB) provision is made in current Government budgets for the expected 40% under-recovery of student loans.  Mr Osborne now suggesting that sales of loan-book assets (capital receipts) – which will inevitably be priced at a hefty discount to their book value – will be sufficient to offset higher RAB charges invoked by increased student lending. The jury remains out as to whether this approach will be successful.

Whatever the logic, the cap will go, so who will be the winners, and who the losers, from the change?

The Russell Group universities, which have done well from the open market for ABB+ students, are unlikely to be worse off, but they may have little to gain. They are clearly unhappy about the change, saying they ‘are not yet convinced … that the quality of provision will not suffer”.

The winners are likely to include the providers who can now look beyond the ABB+ pool and set their own growth targets. These include those universities positioned just below the Russell Group elite, and also the best of the private providers.

The change is also good news for students, who will have a better chance of getting into their institution of choice with less worry about particular A-level grades. They can also expect universities and other providers to compete to offer them better experiences and employment prospects. The Treasury may like this competition to extend to price, but this seems unlikely while students are largely insensitive to differences in fee levels.

The losers are likely to be those who have depended in the past on recruiting among students turned away by ‘better’ universities with full student quotas, not least (but not only) FE colleges offering HE courses.

Finally, what are the long-term implications of English universities taking as many students as they want from 2015?

Some things – such as diminishing grant funding – won’t change. The black hole in BIS’s budget will not go away, neither will the gloomy funding outlook for HE published by the Institute for Fiscal Affairs. While Mr Osborne said nothing about changing the terms of student loans, the sustainability of current repayment arrangements was already questionable. So, to make the loan book more saleable, the Government may need to introduce more onerous threshold and contribution levels (as recommended by Rothschild Bank).

In addition, the introduction of something nearer to market competition will inevitably reopen questions about institutional failures, takeovers and forced mergers. The threat to the HE ‘zombies’ – kept alive mainly by the off-putting costs of closing them down – will be exacerbated. Some will be forced to close altogether, and we should expect further rationalisation of weaker institutions.

With a few sentences, Mr Osborne has dramatically changed the game for universities and other HE providers for years to come.

Prepare for a bumpy ride!

 

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