The sustainability of the UK’s higher education system

by Andreas Schleicher

Director, Directorate for Education and Skills

Skills have become the currency of 21st century economies and, despite the significant increase the UK has seen in university graduation over the last decade, the earnings of workers with a university degree remain over 80% higher than those of workers with just five good GCSE’s or an equivalent vocational qualification. Sure, not every university graduate will end up with a great salary, but on average they take an additional
£160 000 home over their working life, and that's even after discounting tuition, forgone earnings, and the higher tax bill that comes with a better salary. Some say these trends are all futures of the past, and that the job prospects of future graduates may look much worse, particularly if bringing in more and more people eventually means including less qualified applicants. But people have been saying these things ever since I began tracking those numbers over a decade ago and the bottom line is that, so far, the rise in knowledge workers has not led to a decline in their pay, as we have seen for people at the lower end of the skills spectrum.

That brings up the question of who should pay for this, because there simply is no free university education.

The Nordic countries pay for universities through the public purse and even subsidise the living costs of university students. It makes sense for them because participation is almost universal and they have a steeply progressive tax system so that they can recuperate the funds from graduates who typically end up as the better earners.

European countries like France, Germany or Spain, too, say higher education is important, but their governments are neither willing to put in the required funds nor allowing universities to charge tuition. They end up compromising quality and restricting access, with the effect that all workers end up paying for the university education of the rich parents’ children.

The third alternative is to allow universities to charge tuition, and interestingly, OECD data show absolutely no cross-country relationship between the level of tuition countries charge and the participation of disadvantaged youth in tertiary education. In fact, social mobility is worse in Germany which pays for all university education through the public purse than it is in the UK.

But getting tuition right is not simple either. If countries put the burden for tuition entirely on the shoulders of families, they risk not attracting the brightest but the wealthiest children to attend, which means not making the most out of the country’s talent.

If countries rely mainly on commercial loans which students have to repay once they finish their studies, they still leave students and families with the risk, because the promise of greater lifetime earnings of graduates is a statistical one, and there is actually very wide dispersion in earnings. The UK, and some other countries too, have tried to square that circle with a combination of income-contingent loans and means-tested grants. That basically means risk-free access to financing for prospective students with governments leveraging, but not paying, for the costs.

The loans reduce the liquidity constraints faced by individuals at the time of study, while the income-contingent nature of the loans system addresses the risk and uncertainty faced by individuals (insurance against inability to repay) and improves the progressiveness of the overall system (lower public subsidy for graduates with higher private returns). In the UK, the repayments of graduates correspond to a proportion of their earnings and low earners make low or no repayments, and graduates with low lifetime earnings end up not repaying their loans in full.

But even the best loan system is often not sufficient. There is ample evidence that youth from low income families or from families with poorly educated parents, but also youth who just don't have good information on the benefits of tertiary education, underestimate the net benefits of tertiary education. That’s why it has paid off for the UK to complement the loan scheme with means-tested grants or tuition waivers for vulnerable groups.

Sure, those loan and grant systems cost money, and have shifted risks to government which will end up paying for any bad debt. Indeed, it is very likely that repayment rates will end up a lot lower than what the government anticipated. But these costs are just a tiny fraction of the added fiscal income due to better educated individuals paying higher taxes. Keep in mind that the added tax income of those graduates who end up in employment, on average over £80 000 in the UK, is many times larger than any conceivable bad debt.

There is lots the UK can do to further improve its approach to financing universities. For a start, it can do better with aligning course offerings with societal demand. I also worry that the loan repayment parameters mean many middle income workers – such as teachers, health professionals, public sector workers - will end up paying more for their education than better earners such as lawyers and bankers. But among all available approaches, the UK offers still the most scalable and sustainable approach to university finance.

This article originally appeared on the Research Professional website, International Comparison of Tuition Fee regimes.

Links:
Education at a Glance 2014 country note: United Kingdom
Education at a Glance 2014: OECD Indicators (See Indicator B)
Better Skills, Better Jobs, Better Lives: A Strategic Approach to Skills Policies

Photo credit: Students pulling and pushing heavy stone / @Shutterstock

Private vs. public expenditure

by Dirk Van Damme
Division Head, Innovation and Measuring Progress (IMEP) and Head of Centre for Educational Research and Innovation (CERI)

Tertiary education institutions such as colleges and universities raise an increasing share of their funding from private sources. As the latest issue of the OECD’s Education Indicators in Focus details, the major part comes from households via tuition fees and other forms of household expenditure, but institutions also raise more contributions from private companies. Private expenditure now accounts for 30% of expenditure in tertiary education. As the latest issue of the OECD brief series Education Indicators in Focus details, the increase in private expenditure between 2000 and 2009 in OECD countries is remarkable. On average across OECD countries it more than doubled, but countries like Austria, Portugal and the Slovak Republic had growth indexes exceeding 500 points. In 2000, the United Kingdom already drew 32.3% of its expenditure on tertiary education from private sources and further increased it to 70.4% in 2009. The United States, usually seen as a country with the highest level of private expenditure, has seen a decrease from 68.9% in 2000 to 61.9% in 2009.

A simplistic interpretation might suggest that countries have substituted public funding with private resources. On the contrary the evidence shows that the increase in private expenditure did not occur at the expense of public funding. In addition, public funding for tertiary education increased in the same period from an index of 100 in 2000 to an index of 138 points in 2009 across the OECD. Countries such as the Czech Republic, Korea and Poland have seen increases for public funding to more than 180 index points.

The growth rates of public and private expenditure to tertiary education institutions are quite different across countries. Some countries combine high growth rates for both public and private expenditure, such as Austria, the Czech Republic, Mexico and the Slovak Republic. In other countries public and private expenditure have dissimilar growth patterns: Denmark, Portugal and the United Kingdom combined a higher than average growth index for private expenditure with a lower than average growth index for public expenditure for tertiary education.

With different growth rates, both public and private expenditure on tertiary education institutions increased between 2000 and 2009. However, the variation between countries in the relative proportion of private expenditure remains very high, from the Nordic countries with 10% or less private expenditure, to the United States and the United Kingdom with around 60% and 70%, respectively. Private resources have added to public expenditure, and at the country level, a higher level of private expenditure in tertiary education is not associated with lower chances for students from disadvantaged backgrounds to access tertiary education.

For more information
On this topic, visit:
Education Indicators in Focus: www.oecd.org/education/indicators 
On the OECD’s education indicators, visit:
Education at a Glance 2012: OECD Indicators: www.oecd.org/edu/eag2012 
On the OECD’s Indicators of Education Systems (INES) programme, visit:
INES Programme overview brochure
Chart source: Education at a Glance 2012: Indicator B3 (www.oecd/edu/eag2012)

Increasing higher education access: one goal, many approaches

by J.D. LaRock
Senior Analyst, Innovation and Measuring Progress Division, Directorate for Education

Few would dispute that having a higher education is more important than ever to help people build positive economic futures and strengthen the knowledge economies of countries. Yet as the second issue of the OECD’s new brief series Education Indicators in Focus explains, OECD countries have adopted dramatically different strategies for increasing higher education access – both in terms of how higher education is financed, and in the level of financial support they provide to individuals seeking a degree.

For example, in countries with more progressive tax structures, such as Denmark, Finland, Iceland, Norway and Sweden, students pay low or no tuition fees and have access to generous public subsidies for higher education. Tuition fees are much higher in Australia, Canada, New Zealand, the Netherlands and the United States, but students in these countries also have access to significant financial support.

Before recent reforms in Japan and in Korea, students paid comparatively high tuition fees, but had relatively low access to public subsidies. Meanwhile, in Austria, Belgium, the Czech Republic, France, Ireland, Italy, Portugal, Switzerland, Spain and Mexico, students pay little or nothing for higher education, but have limited access to financial aid.

At a time when most OECD countries are experiencing surges in higher education enrolments – but also face significant budget constraints – which model stands a better chance of promoting higher education access and positive outcomes for students in the most equitable way? As it turns out, there’s something to be learned from several of them.

As detailed in the OECD’s thematic review of higher education, charging a moderate level of tuition fees – while simultaneously giving students opportunities to benefit from comprehensive financial aid systems – is an effective way for countries to increase access to higher education, stretch limited public funds, and promote equity by acknowledging the significant private returns that students receive from higher education.

In particular, access to robust financial aid seems to be the key.  For example, countries with especially well-developed student support systems – like Australia, New Zealand, the United Kingdom and the United States – all have above-average university entry rates, even though they also have comparatively high tuition fees.

At the same time, the type of financial aid countries offer is also critical. The OECD’s review suggests that financial aid systems that couple means-tested grants and loans that have income-contingent repayments not only promote access and equity at the front end of higher education, but also lead to better outcomes for students at the back end. Australia and New Zealand have used this approach to mitigate the impact of high tuition fees, encourage disadvantaged students to enter higher education, and reduce the risks of high student loan indebtedness. Other OECD countries that use this strategy include Chile, the Netherlands, the United Kingdom, and the United States.

Increasingly, countries are adjusting their higher education financing and support systems in other ways as well. For example, more countries have raised tuition fees for international students in recent years, in part to shore up the finances of their higher education systems. At least 14 OECD member and partner countries differentiate tuition fees among fields of study to account for the higher cost of operating some academic programmes.  Some countries like Australia have even attempted to link higher education charges to labour-market opportunities by lowering tuition fees for fields with skills shortages.

In an era of booming enrolments and tightening belts, it won’t be surprising if still more changes are on the horizon.

For more information
On this topic, visit:
Education Indicators in Focus
On the OECD’s education indicators, visit:
Education at a Glance 2011: OECD Indicators  www.oecd.org/edu/eag2011
On the OECD’s Indicators of Education Systems (INES) programme, visit:
INES Programme overview brochure

Related blog post:
Higher education: an insurance policy against global downturns

Chart excludes OECD countries for which specific data on public subsidies is not available.
Source: Education at a Glance 2011: OECD Indicators, Indicator B5 (www.oecd.org/edu/eag2011).