University funding changes set to cost more than they save

Changes to the way universities are funded will result in economic costs six times higher than any Government savings, new figures suggest.

The Treasury is set to reduce its expenditure by almost £1.17 billion following the changes in 2012-13, which include allowing universities to charge higher tuition fees and no longer offering teaching funding through the Higher Education Funding Council for England (HEFCE), think tank million+ said.

But a report by the group has found the economic costs of the new funding system are expected to reach more than £7 billion - 6.5 times higher than the Treasury's expected savings.

Reduced earnings for graduates, lower tax revenues from the smaller number of graduates entering the jobs market and a higher write-off of student loans - estimated to increase to almost 40 per cent - are among the reasons for the increased economic costs, the think tank claims.

There will also be a significant inflationary impact, including an increase in the Government's own borrowing costs as a result of higher tuition fees, million+ said.

Pam Tatlow, chief executive of million+, said: "The shift from the direct funding of universities to indirect funding via student loans has protected student numbers and, on paper, helps the Government reduce the structural deficit.

"The real question is how to maintain a thriving, efficient higher education system which is good for students, good for universities and good for the taxpayer.

"Once the total economic costs are taken into account, the jury has to be out as to whether the Government's reforms are the most cost-effective way of funding higher education."

Dr Gavan Conlon, from London Economics, which conducted the research, said: "It is essential for the Government to identify good value for money for the UK taxpayer.

"To do this it must compare the total costs and benefits of changes to the higher education funding system, and at the moment the costs appear to substantially outweigh the benefits."

Students starting degree courses in autumn 2013 will pay just over £8,500 on average, around £120 more than those who went to university last September.

A third of English institutions will charge the maximum £9,000 as standard for a degree, according to official figures published by the Office for Fair Access (Offa).

Around three in four are charging the top rate for at least one of their undergraduate courses.

Ministers had originally claimed that universities would only be allowed to charge over £6,000, and up to £9,000, in "exceptional circumstances".

According to million+, the Retail Price Index (RPI) will increase by about 0.22 percentage points in each of the first three years of the new tuition fee scheme.

This alone will cost £655 million in additional interest payments in the first year of higher tuition fees, the think tank said.

There will also be a 0.24 percentage point increase in the Consumer Price Index (CPI), the group said.

Although the Treasury will gain from increased revenue in alcohol and tax duties - an estimated £20 million in 2012-13 - additional expenditure of approximately £42 million on public sector pensions and £163 million on state pensions will be incurred, million+ said.

Consumers will also experience price hikes on second-class postage stamps, higher regulated rail fares and higher water bills which are linked to either CPI or RPI, the group added.

A Department for Business, Innovation & Skills spokesperson said: "It is right that this report has acknowledged that our reforms have laid the foundations for a better funded and more responsive higher education sector.

"We estimate that the resources for teaching will rise from some £8 billion in 2012/13 to £9.1 billion in 2014/15, allowing for a better student experience.

"Our reforms have made the university system fairer and more progressive and putting students at the heart of the system means that more will have the opportunity to study at their preferred institution.

"But this report does provide a useful contribution to a debate where there is much variation in estimates of the cost of borrowing. Some are higher and some lower than the Government's estimates."