Explaining tuition fees: Accounting & Business

Posted on October 1, 2011 · Posted in Accounting & Business

Tuition fees will rise substantially from the 2012/13 academic year. While English universities will be permitted to charge up to £9,000 a year in tuition fees, the Government had expected most institutions to levy fees much below that. Those hopes have been dashed and the average fee will be almost £8,800.

What the Government had overlooked was the ‘status’ factor in high fees. Any institution not charging the maximum is at risk of implying that its standards are below the elite level.

This reality was hinted at with clarity by Professor John Coyne, Vice-Chancellor at the University of Derby, when announcing it was one of the few institutions not setting fees at £9,000. “We don’t rest on our laurels or historic reputations and notions of status,” he said. “That is ‘old thinking’! Our decision is based on pricing not posturing, fairness not folly!”

Most English universities need to charge at least £7,000 to cover their costs following a big reduction in teaching grants from government, according to analysis by the Institute for Fiscal Studies. But the exact break-even calculation depends on the level of efficiency of an institution and the debt burden relating to past and present capital schemes. For example, the University of Central Lancashire – a former polytechnic and one of the five largest universities in the UK – is to set its fees at the maximum level, saying that it would otherwise make a loss.

The scale of the challenge in covering costs is greater for universities in England than for those in Wales, Scotland and Northern Ireland, where the devolved governments are not demanding the same level of efficiency savings. Scotland’s Government has promised not to introduce tuition fees for Scottish students or for students from EU countries outside the UK and a spokesman said that position will not change for 2012/13. Students from England, Wales and Northern Ireland will have to pay tuition fees at Scottish universities, but the level of fees for 2012/13 have not yet been set.

A decision on tuition fees for 2012/13 in Northern Ireland was deferred until after the recent Assembly elections and all the political parties there oppose the introduction of high fees. One option being considered is, as with Scotland, lower fees for home students than for those from the rest of the UK. In Wales, universities seeking to impose fees above £4,000 will have to obtain permission from the Higher Education Funding Council for Wales.

The financial pressures behind the UK Government’s decision to increase tuition fees have not been widely understood. Increasing tuition fees in England by nearly £6,000 a year (up from £3,375) will achieve financial savings, but not at a level anything like this amount in net terms. About 40% of the higher costs in tuition fees will actually fall on the Government, which will be obliged to increase financial support for students through the Student Loan Company.

Haroon Chowdry of the Institute for Fiscal Studies clarifies: “Our understanding is that the Government saves money overall from the proposed reforms. This is because the effect of subsidising greater loans – which adds to net debt – is outweighed by the cut to the HEFCE [Higher Education Funding Council for England] grant. There are some further subtleties to this, such as the fact that issuing greater loans doesn’t actually impact on the spending or borrowing figures.”

Chowdry explains: “When the Government raises the funds to issue new loans, it’s scored as a financial transaction in the national accounts, which is outside of public spending. So Public Sector Net Debt increases, but Public Sector Net Borrowing doesn’t. Of course, the value of the student loan book – which is a financial asset – also increases, but it increases by less than the debt. The difference between them represents the cost of the loan subsidy.

“Just to be clear: even if you ignored the differential accounting treatment, the net effect is to improve the public finances. The accounting treatment is not a necessary step to achieve that.” Moreover, he adds, tranches of Student Loan Company debt have been sold in the past, generating receipts for the Government. (See box.)

The accounting position of student loans is made particularly complicated, though, by the fact that the Student Loan costs are included in the Annually Managed Expenditure (AME), while loan impairments are charged to Departmental Expenditure Limit budgets. This means that as more loans are issued and at larger amounts – to cover higher tuition fees – so the pressures on DEL will increase as the cost of impairments rises.

ACCA’s head of public sector, Gillian Fawcett, explains: “In terms of the Department’s balance sheet, student loans will be shown as a financial instrument (loans and receivables). In other words, as an asset.  It will show loans brought forward, new loans issued, interest added less repayments and write-offs. “

But, believes Fawcett, the Government and many observers have been optimistic in their calculations of the actual savings that will be achieved under the new system. “In my view, a potential problem will be the extent to which student loans are recoverable,” she says. “The big issue is whether the Government is over-estimating the recoverability of loans. If this is the case then it will have to write-off significant amounts in the future, thus hitting the bottom line and adversely impacting on budgets and future spending.

“It is difficult to see how the above arrangement could improve public spending.  It looks as though there may be potential problems being built-up for the future.”

To put it succinctly, the introduction of tuition fees does not produce anything like the savings in public spending that might be assumed. There are, anyway, other factors behind the change in policy – such as encouraging universities to become more efficient and promoting competition in a ‘higher education market’ from private universities and further education colleges.

The introduction of substantially increased tuition fees has generated much political heat and widespread discussion. Yet there has been little consideration of the financial technicalities that lay behind the decision. In truth, those technicalities are so difficult to understand that it is no wonder that they have not been at the heart of the debate.

Box

The history of student loans

Student loans were first issued in the 1990/91 year, initially as mortgage-style loans. From 1998/99 onwards they were awarded as income-contingent loans, with repayments calculated as a percentage of earnings (currently above £15,000). These are collected by HMRC through the tax system.

Some of the initial mortgage-style Student Loan Company debt was sold by the Government in 1998 to a company called Finance for Higher Education Limited for £1.02bn. Under the terms of the deal, Finance for Higher Education Ltd delegated loan administration to a NatWest company, Lombard Finance. This, in turn, sub-contracted administration back to the Student Loan Company for the initial five year period. Loan administration on these old debts is now carried out by Thesis Servicing, a subsidiary of Link Financial. The main business of Link Financial is to recover difficult to collect debts.

Despite part of the Student Loan portfolio being sold-off, the Government continues to pay debt servicing costs to the acquiring companies for up to 25 years, at a rate of over £1m per month.

The Government is keen to sell tranches of the more recent income-contingent loan portfolio, but says it will only do so when market conditions are right. The value of the Student Loan book as at 31 March 2010 was £24.1bn, with the value of outstanding loans having increased by £3.3bn in the previous year.