Case for change not made

The 2004 Higher Education Act was controversial. It followed a White Paper that aimed to encourage every university to develop its own unique mission and purpose, founded on its own history and culture.

The new system of student finance was intended to reflect and stimulate this diversity. Up to a "cap", varied fees could be charged for different courses. The £3,000 figure was chosen to establish the principle of variability without setting a level that may discourage applicants from poor backgrounds.

The scheme's opponents abandoned rationality to try to gain political support from the relatively wealthy individuals and families who would have to pay more for the advantages gained from university qualifications and resented the reduction in the government subsidy they received.

The legislation has generally succeeded: universities have been able to improve their facilities and respond to students more effectively; applications, including from people from the poorest backgrounds, have grown significantly. Many who opposed change at the time are now supporters.

However, experience has exposed some weaknesses: the means-tested maintenance loan is often insufficient to live on, particularly if rent levels are high; some parents refuse to pay their share of it; and variable fees exist mainly in theory rather than practice.

Lord Browne's Independent Review of Higher Education Funding and Student Finance has the opportunity to recommend changes. There are five I would identify, focusing on removing disincentives to study and securing value for the Exchequer.

The first and most important step is to ensure that students can afford to study without commercial borrowing. They should be able to graduate with only the debts due to the Student Loans Company, repayable through tax from annual earnings above £15,000. Thus, the full maintenance loan must be sufficient to cover reasonable living costs, which is rarely the case now.

Second, some parents refuse to pay their contribution. The move towards full independence at 18 should be completed by giving all students full maintenance loans without means-testing. This would make things fairer, simpler, less bureaucratic and cheaper.

Third, access to universities should be improved by extending the loan system to groups who are now excluded. This includes part-time students and some on postgraduate and non-degree courses.

These three changes would cost money, so a real rate of interest should be charged for student loans. This should not and need not be at a commercial or even a substantial rate and would be fairer for the taxpayer.

Finally, the Exchequer would benefit if there were incentives for the early repayment of loans. Many relatives would like to pay off any outstanding balances as their children graduate and many have the means to do so. But there is no positive incentive for early repayment and the zero real rate of interest is a disincentive.

These changes should be linked. The establishment of a real rate of interest should be matched by improvements in the system, such as those I've described. This may even be popular, which a simple Treasury clawback would not be.

Beyond these changes, much interest has focused on the tuition-fee cap. A central argument for raising, or even abolishing, the cap is that this would create more diversity by establishing variable fees. Some argue that the £3,000 cap was too low to permit this. However, I believe that the major reason why universities have not diversified to the extent expected is not that the cap is too low, but that too many are unwilling to try new approaches.

University culture continues to resist change of this type, so there is little evidence that increasing or removing the cap would lead to variability. If badly handled, a big fee increase may discourage applications.

The Government should raise the cap significantly only if universities succeed in making the case that a higher level would promote diversity (including differing fees for different types of course) without deterring applicants from poorer backgrounds. Universities have yet to make that case convincingly.