Open University[1] Submission (March 2018)

House of Commons Public Accounts Committee – The Higher Education Market in England

Executive Summary

1. The Open University welcomes the inquiry into the Higher Education Market in England. We make our response through the lens of part-time higher education in England, and in the specific context of our unique experience as the only university operating in all four nations of the UK.

2. In response to this inquiry, the OU makes the following key points:
• Part-time higher education has a significant positive impact on the public finances.
• The cost to the public purse of a part-time degree is substantially lower than the cost to the public purse of a full-time one.
• The funding reforms of 2012 caused a decline in part-time higher education. The market is broken. This is bad value-for-money for the taxpayer and also bad for economic growth, student choice, diversity of provision and social mobility.
• Incentivising a shift towards part-time study – as intended by the 2012 reforms – would help improve the value-for-money of the higher education system.

3. The OU recommends that action is taken to fix the broken market in part-time higher education, including:[2]
• Introducing a ‘part-time premium’ for part-time higher education to reduce the cost of tuition, as recommended in Wales by the Diamond Review.[3]
• Providing tax incentives for employer and individual contributions to tuition fees for undergraduate courses, as recommended by the LSE Growth Commission and the Institute of Directors, among others.[4]
• Taking action to make the market function more effectively, including improving information, advice and guidance; developing a universal credit transfer system; supporting people with the upfront costs of short higher education courses and allowing more people who are retraining to access student loans.
• The Office for Students adopting a number of actions to embed social mobility right through the English HE system: setting clear national targets; encouraging collaboration, using funding and metrics to shape the market and give providers the right incentives; creating an excellent information, advice and guidance system; and ensuring that flexible options are available to allow people from all backgrounds and all ages to participate.[5]

Introduction

4. The student funding reforms introduced in 2012 had a huge impact on the part-time higher education sector. The number of entrants to part-time undergraduate courses at universities in England is now less than half what it was in 2011/12.[6]

5. This has had a severe detrimental impact on social mobility:
• There was a 16 per cent reduction in the number of higher education entrants from disadvantaged areas in England between 2011/12 and 2015/16.[7]
• Far fewer young adults are able to access a “second chance” of higher education than before the funding reforms, with a 21 per cent decline in the number of 20-24 year olds, and a 31 per cent decline in the number of 25-29 year olds, accessing higher education.[8]
• It is more difficult for people to retrain over their working lives, with only half as many 30 to 59 year olds accessing higher education as there were in 2011/12.[9]

6. This catastrophic decline in part-time higher education was unanticipated and counter to the UK Government’s policy objectives. Back in 2010, the Browne Review suggested that the part-time funding reforms would ensure ‘a wider range of people can access higher education in a way that is convenient for them’.[10] UK Government Ministers noted that ‘One of the main objectives of our reforms is to allow greater diversity of provision, which means more short two-year courses and more part-time opportunities’.[11] The UK Government’s impact assessment concluded that ‘as far as students eligible for the fee loan are concerned, we would not expect a negative impact on the demand for part-time study’.[12] There were also worries within Government about the financial risk arising from potential increases in part-time student numbers driven by the reforms.[13]

7. The Open University has argued elsewhere that this collapse in part-time higher education is the symptom of a broken market.[14]  Market failures mean that there is inefficiently low participation in part-time higher education, with many individuals choosing not to study even where there are substantial net benefits to themselves as individuals, the public purse, the economy and wider society.

8. This conclusion is shared by others. The Director-General of the CBI has described the decline in part-time higher education as ‘alarming’ and said that ‘it matters to individuals, businesses and the wider economy that we reverse this trend’.[15] Lord Willetts, the Minister for Universities and Science at the time of the reforms, has said that the collapse in part-time student numbers is ‘one of my biggest regrets about my time as Minister’.

9. The National Audit Office report highlighted several of the specific issues that lead to this part of the higher education market not working effectively, including:
• Lack of information and support to help people make an informed choice. This is an even bigger issue for adults than it is for school-leavers.
• Financial incentives for providers to prioritise young, full-time students, who are less costly to teach.
• An increasing reliance by the Government on the market to achieve its skills and lifelong learning objectives despite weak incentives to meet these priorities.
• The impact of the 2012 funding reforms in putting students off part-time study, putting employers off sponsoring studies for their employees and leading to a 44 per cent reduction in the number of people studying sub-degree qualifications.
• The lack of an overarching strategy for lifelong learning to guide the Government’s plans for addressing the drop in lifelong learning in higher education to ensure they have sufficient impact to achieve their objectives. For example, accelerated degrees are being encouraged to help address the fall in the number of mature learners but the Government has no clear understanding of their likely impact on student numbers (the official impact assessment suggests it is likely to be marginal).[16]
• The impact of low switching rates – driven by difficulties for students transferring credit for their studies in one institution to another – on quality.

10. This inquiry is an opportunity to reflect on how to improve the operation of the higher education market to tackle these issues, improving flexibility to support the Government’s social mobility, lifelong learning and value-for-money goals.

Part-time higher education and value-for-money

11. The improvement to the public finances from the increase in tax revenues driven by higher graduate earnings alone is substantial.[17] This is the case for people who graduate later in life too. Recent analysis by London Economics suggests that someone achieving a degree from the OU sees their lifetime earnings increase substantially.[18]

12. For example, the analysis estimates that someone who begins their studies with GCSEs as their highest qualification (like one third of OU degree entrants)[19] who graduates at the age 37 (the age of the typical OU graduate)[20] sees their undiscounted lifetime earnings increase by an average of £377,000 for men and £196,000 for women in real terms (2015-16 prices).[21] Such increases in earnings would lead to higher undiscounted lifetime tax payments of £191,000 for men and £93,000 for women in real terms (2015-16 prices).[22]

13. Based on the investment appraisal methodology set out by the UK Government in the Green Book,[23] the present value of the lifetime increases in tax receipts from such graduates is estimated at £106,000 for men and £53,000 for women (2015-16 prices).[24] This is much higher than the public subsidies supporting Open University students via the student loan system and teaching grants. London Economics estimates that the internal rate of return[25] to the public purse for such students is 25 per cent for men and 19 per cent for women.[26]

14. The UK Government measures the cost of future loan write-offs and interest subsidies using the Resource Accounting and Budgeting (RAB) charge. This measures the difference between the face value of the loan book and the present value of forecast loan repayments. It is presented as a percentage of the face value of the loan book.[27] The estimated RAB charge is updated regularly in line with changes in earnings forecasts, the cost of government borrowing and the parameters of the repayment system. The most recent official estimate for the entire student loan book is 40-45 per cent.[28]

15. The public subsidy associated with student loans varies by mode of study – part-time degree loans require lower subsidies than full-time loans:
• The public subsidy for every pound lent is lower for part-time degrees than for full-time degrees. London Economics has estimated that, following the decision in October 2017 to increase the repayment threshold to £25,000, the RAB charge for full-time degree loans stands at 44 per cent and the RAB charge for part-time degree loans at 36 per cent.[29] This is consistent with the latest official estimates.[30]
• Part-time study requires smaller loans. First, tuition fees for part-time courses are 27 per cent lower than for full-time courses: the average tuition fee for full-time degree study was £8,996 in 2017/18[31] compared to £6,500 for an equivalent number of credits in part-time study (£5,728 at the Open University).[32] Second, part-time students are not currently eligible for maintenance loans. While maintenance loans are being extended to some undergraduate part-time students from 2018/19[33] and, hopefully, to all undergraduate part-time students, including distance learning students, from 2019/20, it is expected that average maintenance loans will be lower than for full-time students.[34]
• Part-time students pay more taxes while studying. A study commissioned by the UK Government in 2011/12 found that more than eight out of ten part-time students were in employment, and working part-time students had average earnings of £14,695. In contrast, only half of full-time students were in employment, with average earnings of £3,200.[35]

16. Taken together, this means that the cost to the public purse of a part-time degree is substantially less than the cost to the public purse of a full-time degree: Open University analysis in 2013/14 found that a part-time first degree graduate requires 27 per cent less public funding than a full-time one.[36]

Should all university courses receive the same level of government subsidy?

17. There is significant variation in the public subsidy received for different higher education courses. For example, all other things being equal:
• Students on courses in high-cost subjects receive higher direct subsidies via the HEFCE teaching grant.
• Students on courses charging higher tuition fees receive additional subsidies via higher tuition fee loans.
• Students studying full-time – especially those from disadvantaged backgrounds or who are studying in London – receive additional subsidies via higher maintenance loans.
• Students with lower career earnings receive additional subsidies via making lower student loan repayments.

18. However, the picture is a complicated one – it is tough for government and potential students to accurately estimate the subsidies an individual student will receive via the student loan system: these aren’t know with certainty until 30 years after a student has graduated. However, it is clear that, as noted in paragraph 15, estimated public subsidies for part-time courses are substantially lower than public subsidies for full-time courses.

19. It is worth noting that, despite lower public subsidies, the cost to the institution per full-time equivalent student tend to be somewhat higher for part-time study, mainly due to the fixed costs per enrolment in terms of student administration and pastoral care, and lower cohort sizes in evening and weekend courses. For example, analysis commissioned by HEFCE found that part-time study involved a 15 to 39 per cent higher cost per full-time equivalent student.[37]

20. In Wales, the Diamond Review emphasised the importance of ensuring that the funding system did not incentivise a particular mode of study and proposed funding reforms aimed at ensuring that ‘public investment in part-time students is comparable to that for full-time students’. It recommended an increase in teaching grants for part-time study determined by ‘applying the difference between the full-time and part-time RAB to the average loan available to part-time students’.[38]

21. Similar reforms in England could help improve the value-for-money of the higher education system by incentivising a shift towards part-time study: reducing the required public subsidy; supporting a stronger link between employers’ skill needs and higher education provision; and improving productivity by tackling skill shortages through helping the current workforce reskill and upskill. Such a shift towards part-time was a stated objective of the 2012 higher education funding reforms.[39] The UK Government’s Industrial Strategy noted ‘as automation and digitalisation change the nature of jobs and the skills required to do them, and as working lives become longer, it is vital our education system allows people to learn and train throughout their lives’:[40] This requires a vibrant part-time higher education system that is effective in enabling more people to learn while they earn.

What impact have the 2012 student loan reforms had on the finances of the higher education sector?

22. A number of commentators have observed that the 2012 student loan reforms have had a positive impact on the finances of the higher education sector as a whole.[41] For example, total income received by the higher education sector has increased from £24.7 billion in 2011/12 to £29.1 billion in 2015/16 in real terms (2015/16 prices).[42]

23. However, the financial impact of the reforms varies widely across the higher education sector. There are significantly reduced revenues with respect to teaching part-time students, driven by the combined impact of the sharp reduction in undergraduate part-time student numbers and the 72 per cent real-terms reduction in the total HEFCE teaching grant.[43]

24. This is having a detrimental impact on the viability of many part-time courses and the incentives for universities to offer this type of provision, reducing the diversity of the higher education sector and the choices that are open to students. As the National Audit Office noted in their report on the HE market: ‘Providers have a financial incentive to prioritise young full-time students who are less costly to teach’.[44]

Is it clear to prospective students what they are signing up to when they take out a student loan?

25. Our evidence suggests that there are serious issues with the advice and support that is offered to adults who are looking at their higher education options, including advice about the financial support available to them. This makes it more difficult for adults to make well-informed choices based on a good understanding of the pros and cons of different options and how the student funding system can support their learning.

26. For example, market research carried out for the OU[45] found that, of those interested in part-time study:
• 59 per cent are put off from studying because of issues relating to funding, affordability or the expense of studying.
• 56 per cent say they are worried that they would not be able to pay back a loan taken to finance their tuition costs.
• Only 30 per cent are aware that subsidised fee loans are available.

27. There is far less government support for helping adults make effective higher education choices than there is for young people. There is nothing for adults analogous to the face-to-face support and advice young people get from their schools and colleges, the UCAS portal and various government initiatives aimed at encouraging young people to apply to university.

28. This was acknowledged by the Browne Review, which noted that adults ‘will need effective and high quality guidance to take advantage of the new opportunities’. It recommended that adults receive similar individualised careers advice as is available to those of school age and the creation of a single applications portal for university and student finance operated by UCAS.[46]

29. The ‘effective and high quality guidance’ envisaged by the Browne Review is still not available to adults. More action is required if the UK Government is to achieve its goal to ‘support everyone, whatever their age, to go as far as their talents will take them and have a rewarding career’.[47]

About The Open University

• The OU is the only UK-wide university, operating across England, Wales, Scotland and Northern Ireland, as well as internationally.  Since we were established in 1969, over two million people have achieved their learning goals by studying with us.  Currently, the OU has over 174,000 students. The median age of new OU undergraduates is 28.

• The OU mission is to be open to people, places, methods and ideas.  Being open to people means we have an open access policy and, for most of our courses, accept students who do not have A Levels or equivalent qualifications. This open admissions policy helps thousands of people who did not achieve their potential earlier in life to ‘go as far as their talents will take them’. Of the OU students who declare their previous qualifications, 33% have only one A level or a lower qualification when they join us (a further 2% have no formal qualifications).

• Through its flexible, distance learning model, the OU has a long pedigree of support for students who want to ‘earn while they learn’. Three out of four of our students work full or part-time during their studies.  88% of FTSE 100 companies have sponsored staff on OU courses.

• Of all universities in the UK, the OU makes by far the largest contribution to social mobility: 
• Almost 1 in 10 of all English first year undergraduate students from low participation areas in 2015/16 are studying at the OU.[48]
• 55% of English OU students come from disadvantaged backgrounds: either living in a low participation area (20%), with a disability (18%) or with less than the minimum entry requirements for attending a traditional university (34%). The equivalent figure for English full-time students is 29%.[49]

• The OU supports people from all backgrounds, and all ages. Indeed, the OU ranked 16th out of 130 English HE institutions in terms of the number of young undergraduate entrants from low participation areas in 2015/16.[50]

• The OU is the primary provider of HE in UK prisons and secure units.  In the last academic year approximately 1,300 students in prisons and secure units across England, Scotland, Wales and Northern Ireland studied with us. Across all security categories, there are OU students in approximately 150 prisons in the UK and Ireland.

• The full-time equivalent fee at The Open University in England in 2017/18 is £5,728. This is 36 per cent lower than the average cost of an equivalent number of credits at full-time providers of £8,996.

• Recent publications by The Open University of relevance to this inquiry include:
• Fixing the Broken Market in Part-Time Study, HEPI, 2017
• Social Mobility and the Office for Students: The Five Essentials, 2018
• Submission to Education Select Committee Inquiry on Value-for-Money in Higher Education, 2017
• Submission to Treasury Select Committee Inquiry on Student Loans, 2017

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