It was always going to be one of the knottiest political problems for the Coalition Government to solve. From the outset it was even agreed that Liberal Democrat MPs would be allowed to abstain without bringing the whole government crashing to its knees. But this week ministers have made a decision on how universities should be financed and, so far at least, it looks as if the political fallout may be slight. But is the policy the right one?

Long before the financial crisis made the need to cut government spending an urgent priority, the issue of how to fund Britain’s universities was already a big headache. In the days when most current politicians were at university it had all been quite simple. Central government funded universities directly through a national body, the University Grants Commission, and students themselves received from government a maintenance grant to keep them in food and beer. No one seriously questioned whether it was fair for taxpayers to be footing the bill for young people to get themselves degrees since it was widely agreed that it was good for society as a whole (and not just for them) that the brightest young people should get as good an education as possible.

But that was when the number of people going into higher education was fairly small. For twenty years or more that number has been growing steadily and governments have been encouraging the growth. John Major’s government abolished the distinction between universities and polytechnics so that all could call themselves universities. And Tony Blair’s government set a target of 50% of all young people becoming university students. With such numbers the old financing system was unsustainable.

The Labour government took away maintenance grants from most students and introduced a system of student loans to be paid back once new graduates started to earn a reasonable income. It also ushered in what were called 'top-up fees', payable by students to supplement the income universities were getting from the government. The fees, which had a cap of just over £3,000 a year, themselves became financeable by loans.

This led to squeals all round. Students complained that they were having debts hung round their necks and that the very prospect of this would deter bright youngsters from poorer backgrounds from going to university in the first place. And universities argued that the capped fees and the cuts to direct government funding of universities were putting them under very severe financial pressure. So, in one of its final acts, the outgoing Labour government asked Lord Browne, the former chief executive of BP, to head an inquiry into university funding.

Meanwhile, the election took place. The Lib Dems joined up with the National Union of Students in signing a public pledge for no increase in tuition fees. Their favoured solution was a graduate tax. But the Conservatives were opposed to a graduate tax. One of the problems highlighted about it was that it was possible to imagine a situation in which two people doing an identical job would be taxed wholly differently, one paying a graduate tax in addition to income tax simply because he or she had a degree, while the other only paid income tax. The inequity of this was thought to make the idea unworkable.

Lord Browne reported earlier this autumn and his most striking recommendation was that there should be no upper limit on what universities could charge as fees. The idea that fees should be merely a 'top-up' was, in effect, being abandoned. And when the Chancellor announced in his comprehensive spending review last month that Government funding of the teaching element of university activity was to be slashed it was clear that graduates rather than Government were to become the chief financiers of university teaching.

Now the Government has indicated how this is to be done. Ministers have rejected Lord Browne’s proposal for unlimited fees and have decided instead to raise the current cap of £3,290 to £9,000. Universities that raise fees above £6,000 will have to demonstrate that they are making adequate efforts to attract poorer students and the Government itself is spending an additional £150m a year for scholarships to the brightest students from poor backgrounds.

Under the new system, graduates will have to start repaying their loans only when their annual income reaches £21,000 rather than £15,000 as now. High earners won’t be allowed to pay off their loans more quickly and will be charged a higher interest rate. This allowed the universities minister, David Willetts, to claim that the new system, to be operational from 2012, will be more progressive than the old one, even with the higher fees charged.

This would seem to be enough to persuade some Lib Dem MPs to go along with the plan, although others are saying that because they made a public pledge to oppose any rise in fees they are obliged to vote against.

The universities themselves have responded varyingly to the new plan. The elite universities within the Russell Group have welcomed the opportunity almost to treble their fees as 'a life-saving cash transfusion'. But many less prestigious universities fear that higher fees will deter potential students who may calculate that the increased debt burden is not worth the qualification it will be buying. Some of these universities fear that they may go out of business.

Some may try to adapt by offering shorter courses, though this won’t be possible in some subjects like medicine. These universities may also find themselves in competition with the expanding sector of private higher education institutions which may see an opportunity to undercut existing universities by offering more intense courses at lower prices. Many are able to offer degree-level qualifications.

What does seem clear is that we are moving away from an essentially state-financed university system to one privately financed by graduates themselves. To some this will seem only right because, they argue, it is not fair for taxpayers to finance what amounts to an opportunity for some people to earn qualifications which will raise their lifetime incomes. Others will argue that without much more considerable state-financing, poorer students are bound to be deterred from going to university with the result that inequalities in society will become even more entrenched.

It may also turn out that with students having to end up paying for their own higher education the numbers inclined to go down that route will fall. Tony Blair’s target of 50% in higher education may well then not be reached. Some will say that in a highly competitive world economy full of cheap labour, this would be a disaster as a high-wage country such as ours needs as many graduates as it can get. Others, however, will say that it’s a good thing if young people have to think twice before deciding a university education is the best thing for them and that for some young people there are many better ways of getting on in life than spending three years getting a degree that may prove of little benefit to them.

What’s your view?

  • Do you agree with the principle that graduates should contribute more to the financing of their degrees or do you think university teaching should be paid for mostly by the taxpayer through direct government grants?
  • If graduates should pay more, do you think it should be through higher fees and loans, or via a graduate tax?
  • Do you think there should be no limit on what universities should charge in fees or do you support the £9,000 cap proposed by the government?
  • Do you think some potential students will be deterred by the higher fees or not?
  • Do you think the new system for graduates to pay off loans can fairly be called “progressive” or not?
  • Do you think LibDem MPs should vote for the new plans or not?
  • And do you think that it is in the country’s (and individuals’) interest to aim for 50% of young people going to university or do you think it would be better if we ended up with fewer graduates?
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