The many problems with a market for higher education

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In April this year, the Office for Students will become the “regulator and competition authority” for the English higher education sector. The establishment of this authority, complete with its own “chief executive”, captures perfectly the transition of the country’s university sector, where income from tuition fees has gradually supplanted direct government funding over the last few decades.

This process of government-encouraged marketisation — one of those rare instances where Latinate jargon is actually instructive — naturally leads to a conception of the student as a customer or consumer.

It has therefore generated high levels of competition between universities, which encourages them to do new things, like improve their accommodation, advertise on YouTube, or issue hundreds of millions of pounds of debt in international capital markets.

So what kind of a “market” are we dealing with here? Enter: the National Audit Office, which in December produced a report on the matter. It pointed out that the average student debt for a three-year degree is £50,000 – a “legal financial liability”. The independent body, which is funded by Parliament, also revisited the theme this week in a blog, which argued that students “don’t have the same protections at the point of sale as some other services”.

Similarly, from its longer analysis late last year and with their emphasis:

Higher education has a more limited level of consumer protection than other complex products such as financial services. Higher education providers must comply with general consumer law, to ensure they do not make misleading claims and that courses match their description. Student loans also have certain statutory protections, in that repayments are income-contingent and any unpaid balance is automatically written-off after a set period.

However, higher education has some features in common with complex financial services, due to the complexity of the product, uncertainty over long-term outcomes, and the financial commitment of a student loan. Where financial products are complex and retail consumers may be vulnerable to making poor choices, the Financial Conduct Authority expects financial services firms it regulates to disclose clearly the risks of such products to potential customers, to minimise the risk of mis-selling or sale of unsuitable products. There are limited comparable requirements in higher education, however, despite strong financial incentives for providers to attract as many students as possible. Prospective students have very little access to independent advice.

The strengthening of these incentives is closely connected to the consumer-protection issue. The marketisation process, as a corollary to competition, introduces (and even encourages) the threat of failure. This risk incentivises aggressive marketing on the part of cash-strapped universities, who are selling a service mostly paid for with government credit.

On the other hand, the marketisation process also encourages students to assess the value of a degree, but the unique nature of the credit available to them profoundly distorts that calculation, even if the 18-year old in question has inexplicably mastered all varieties of discounted cash-flow modelling.

Because students are paying for tuition through government loans, which are repaid through an effective marginal tax rate on their future earnings, they are unlikely to discriminate between prices in the way that consumers typically do. It is likely for this reason that most institutions have been able to find “customers” at the same price point — pretty much everyone charges the £9,000 a year maximum (87 out of 90 in 2016 in England, according to the Institute for Fiscal Studies). Arguably, a prominent institution which charged less would suffer a competitive disadvantage, by potentially identifying itself as of a lower calibre than any other institution in the eyes of prospective students.

In fact, the fundamentals of education finance generate enormous problems with even beginning to discuss “value for money”, which is a necessity before questions around mis-selling can be properly raised.

How do we calculate value for the individual student? Traditionally, we might take graduate earnings as a proxy for value. But those who graduate and earn below the repayment threshold will never pay anything, thereby conceivably receiving the best value for money for the actual education they receive. (Admittedly, this wouldn’t be true is if not going to university would have increased their earnings, which is possible, especially once the three years outside the labour market and the additional costs associated with university are factored in.)

The post-2012 loans system involves relatively high interest rates for certain earners, at least in the current rates environment. At some good but not astronomical salaries, interest can accrue more quickly than repayments are made, for example. Gavan Conlon at London Economics has also shown how the post-2012 student loans system is in some instances regressive. As he writes:

Compared to men in financial or legal professions, who pay an average of 2.0%-2.1% of gross earnings towards the costs of repaying their student loans, men in social work, teaching and nursing occupations pay between 3.2% and 3.6% over their working lives.

The broader question of value to the taxpayer is similarly complicated; the taxpayer is specifically, under the loans system, funding students who earn relatively low amounts over their careers. Setting aside grants, it is not providing additional funding to students from poorer backgrounds, unless those students fail to acquire well-paying jobs. Then, we have the problem of shifting labour market priorities over coming decades, which force continual reassessments of a degree’s employment value.

All of this is before we address the Gradgrindian notion that education should primarily be valued in terms of labour market performance. If education confers something of value beyond its role as a ticket to or positional good in labour markets, that would significantly increase the value for money for the lowest earning graduates.

This last point — an ephemeral ideal of educational value to society — may end up, ironically, helping the overall system avoid accusations of mis-selling, even while it has been shifted towards a model which invites those kind of accusations.

Above all, the NAO’s analysis highlights additional convincing reasons to think of modern day education as a primarily financial phenomenon, with its own unique, quasi-credit fuelled conception of money, and its own unique, as-of-yet undefined conception of value.