Rethinking university funding in England requires more imagination

No one is happy with the current university funding model in England.

Universities believe they are underfunded and are increasingly dependent on overseas student fees. Students face an average debt of £50,000 on graduation owing to tuition and maintenance costs. Current students face 40 years of repayments. Graduates who attended university between 2011 and 2022 (with Plan 2 loans) face only 30 years, but they are burdened with high marginal tax rates because of the interaction between student loan repayments and frozen income tax thresholds. For them, high interest rates mean debt increases despite repayments – even if repayments are not linked to the amount of debt.

Moreover, graduates are, understandably, furious about retrospective changes to their loan arrangements. The Labour government, meanwhile, is frustrated at having to defend a complex system which they criticised in opposition. The Conservatives tie themselves in knots attacking a system they created.

But if no one is happy, nor has anyone found a solution to the twin challenges of funding higher education and cutting high student debt. Although there is a strong case for intervention to alleviate the challenges facing current graduates, in reality, there is no solution to that without clarity about the principles for a long-term, sustainable and fair funding system. Once the key principles are in place, they can be used to address the injustices of previous plans, as well as in shaping a future system.

Some people still argue for a graduate tax, although it has inbuilt problems: the Treasury does not like hypothecating taxation; universities are unlikely to thrive on reallocated tax revenue and, perhaps worst of all, a graduate tax keeps the focus on conventional three-year degrees when more diversity is needed. No country in the world runs a successful graduate tax.

Redesigning the system requires clear principles. University funding is a long-term question; short-term fixes inevitably make it more complex and store up problems. Given the collapse of political support for the current system, a review is inevitable, and it should probably have happened soon after the general election. We think that there are four principles that should drive funding: cost-sharing, diversity, participation and fairness. 

First, the costs of higher education should be shared between graduates and the wider population. This is because advanced education benefits both those who study it and society. The higher costs of expensive but nationally important subjects should be reflected in teaching grants, but the principle of cost-sharing is more general. This idea was assumed when the tuition fee system was introduced, but subsequent tweaks mean that it has fallen away for Plan 2 borrowers, for whose education the public contribution has become negligible.

Second, the funding system should shape diverse provision. Three-year, full-time undergraduate courses have a part to play, but so does regular reskilling, built around short courses involving universities and further education. The current funding system is geared for a full-time, three-year delivery model, and the capacity of the lifelong learning entitlement to shift it remains untested. Part-time higher education has significantly declined since 2011, so the government may need to be directive to create diversity. 

Third, cost itself should not be a deterrent to higher education participation. This means looking at both tuition fees and maintenance costs. The latter are often participation barriers for less-well-off students. Addressing total participation costs could unlock more part-time study, more two-year provision and more local provision. 

Finally, the system needs to be fair to both those who go to higher education and those who don’t, to young and older people. In terms of fairness to graduates, that means a reasonable interest rate. It also means that interest should accrue only after a course finishes. It means loans should be written off after 30, not 40 years. And it means no significant negative changes to the loan system once students have signed up. It may need stepped repayments, whereby more graduates pay at a lower rate and repayment rates for middle earners are capped, rather than having a cliff-edge threshold. 

Beyond these principles, we need creativity and imagination. It’s not easy to square the interests of graduates and non-graduates, universities, employers and society, the short term and the long term. But England needs a thriving higher education system which does not disincentivise participation. Above all, that demands a greater diversity of provision to meet the accelerating technological and economic challenges that the country cannot avoid facing up to.

Chris Husbands was vice-chancellor of Sheffield Hallam University between 2016 and 2023 and is now a director of Higher Futures. David Laws served in government as chief secretary, schools minister and Cabinet Office minister, before leaving Parliament in 2015. He is now chair of the GCSE and A level awarding body AQA. David was formerly chair, and Chris is the current chair, of the Education Policy Institute.