Universities call for a tuition fee rise – here's what that would mean for students and taxpayers

University vice-chancellors in England and Wales have recently called for an increase in tuition fees.

There are a number of reasons for this demand. In the face of a decade-long decline in real pay for university staff, pressure from unions for a higher wage deal is increasing. Energy costs are hitting unprecedented highs.

The current tuition fee cap of £9,250 in England has been in place since 2017 and the government plans for it to remain frozen until 2025. With inflation now hitting 10%, this means that by 2025 there will effectively have been a long-term cut to university per student incomes by around a third.

A substantial rise in tuition fees in the near future towards £12,000 or £13,000 a year, as suggested by the founder of the University of Buckingham medical school Karol Sikora, looks increasingly inevitable.

This is despite the government setting out its current plans for the future funding of higher education only in February this year. The government's plans are for a lower salary threshold for student loan repayment, a longer term of repayment (40 years instead of 30), and the fee freeze.

So what would higher fees actually mean for students, and for taxpayers who ultimately subsidise higher education?

More cost to the taxpayer

The average student loan in 2021/22 was £46,000, consisting of approximately three years of full tuition fees at £9,250 a year and three years of maintenance loans at £6,000 a year.

Under the current system, a student earning a starting salary of £40,000 a year with annual pay rises of 2.5% would not pay off this loan. They would pay a total of £84,000 over 30 years, of which £54,000 was interest, and leave nearly £16,000 unpaid.

An increase in fees to a hypothetical figure of £13,000 a year would result in the same £84,000 worth of repayments over 30 years, but almost all of it would be the interest on the initial debt. £56,000 worth of debt would remain unpaid after 30 years, with the taxpayer footing the bill. Even with the repayment term extended to 40 years, £12,000 would remain unpaid and written off.

Of course, this assumes that maintenance loans (which cover students' living costs) are not affected, which seems unreasonable in the current economic environment. The final debt figure and amount left unpaid is likely to be higher still.

However, loan repayments are notoriously difficult to estimate far into the future. Inflation, interest rates, increasing annual incomes and work and life expectancy changes all affect repayment calculations.

Under current loan repayment schedules only about 20% of students are expected to fully repay their student loan. This effectively morphs tuition fees and their associated loans into a graduate tax for everyone else.

The government's planned changes to repayment schedules from 2023/24 would increase this to just over half of graduates fully repaying their debt, but this proportion would likely drop again if fees rise.

So increasing the nominal fee level would mean about half of graduates would pay more and over a longer time. But the other half would not actually be affected as they won't fully pay off their debt even at the current fee level. Instead, it would shift more of the cost of higher education onto the taxpayer.

Doubts about university

Perhaps the greatest danger of increased fees would be that the higher debt and potentially higher lifetime repayments will put off talented young people from less advantaged backgrounds from going to university at all. We know that aversion to debt is stronger among those with lower family incomes, and so there is a real danger for social mobility should fees be seen to be prohibitively high.

On the other hand, allowing the amount of income per student that universities receive to be eroded away by inflation, amid all the other increasing costs they face, is likely to lead to some universities having to cut back on places, cut courses, merge with other institutions or, in extreme cases, close their doors permanently.

These cutbacks would also be damaging for social mobility. If there are fewer universities and university places, the spots that remain are likely to disproportionately go to better-off students.

Is it worth it?

The question that is missing from popular discussion around tuition fees is: are degrees worth it? The answer to this question is key. It can change the perception of student debt immensely.

The short answer is yes. Even though students feel that the current cost of university is poor value for money, graduating from university continues to be beneficial. By age 29, men earn 8% more then their contemporaries who do not go to university. Women earn 28% more.

The Institute for Fiscal Studies estimated that even after taking higher taxes paid by graduates and loan repayments into account, the average financial return over a lifetime of doing a degree is £130,000 for men and £100,000 for women. These are substantial returns, and would dwarf the impact of a small increase in tuition fee costs, so lifetime returns are likely to remain high whatever happens to fees in the next few years.

This comes of course with the caveat that not all degrees will lead to the same return in earnings. Studying maths, medicine or economics is likely to result in significantly different earnings when compared to studying creative arts or social care.

The number of 18-year olds in the UK is estimated to increase by 24 percent between 2020 and 2030. This demographic boom will fuel increasing demand for higher education, and with the myriad cost pressures facing universities, something will have to give.

Given the returns still available, a rise in fees to support universities right now is perhaps the way to go rather than risking the financial collapse of a number of institutions.

Franz Buscha has previously received funding for research from the Economic and Social Research Council and the Department for Education.

Matt Dickson currently receives funding from the Economic and Social Research Council and the Nuffield Foundation and in the past has received funding from the Department for Education, the European Union and the Low Pay Commission.