Higher education faces a major funding cut in next month’s Spending Review and after the next election, according to the final report of the Commission on the Future of Higher Education, published by the think tank IPPR next month (10 June).

The report will argue that, although higher education must contribute towards deficit reduction, spending cuts must not be allowed to degrade the critical contribution universities and colleges make to economic prosperity and social justice in England. The Commission models five long-term reform options for the student finance system but also outlines a set of short term measures that it argues are necessary to steer the higher education through the forthcoming Spending Review and the immediate years ahead. The Commission’s reforms include: Creating a new £5,000 ‘fee-only degree’ for students who live at home and/or work part-time. These students would not be eligible for maintenance grants and loans so would pay a lower tuition fee. The new fee-only degrees would also save the Government £10,000 per student and enable ‘low cost expansion’ of the HE sector by up to 20,000 extra students.

Holding steady the proportion of 18-21 year olds going to university on full cost courses, which means that between £1.5bn and £3bn could be saved over the next seven years because of a natural decline in the numbers of 18 year olds in the population. Holding the ‘teaching grant’ flat in cash terms (saving £104m), while also holding the maximum tuition fee at £9,000 and not increasing it in line with inflation until 2017/18. Continued cash ring fencing of the science and research budget. The report argues that international students should be removed from the government’s net migration target and post-study work opportunities brought into line with our international competitors. This would allow universities to raise more of their own funds from overseas students' fees. The Commission also argues that the government should stop making changes to the system for overseas students because the insecurity this generates is damaging to the UK’s reputation.

The report says that, taken together, these reforms would allow the Government to protect spending on science and research and widening participation in next month’s Spending Review and return to real terms increases in science funding after 2017/18. These should be priorities because they will be crucial to driving economic growth and social mobility in the future. IPPR’s projections suggest that on current government plans, the higher education budget could be cut by around £1.2bn over the next Parliament, a cut of almost a third. The Commission’s final report argues that the immediate challenge is to navigate this period of deep spending cuts in a way that does not do lasting damage to one of the nation’s most precious assets.

Nigel Thrift, Chair of IPPR’s Commission on the Future of Higher Education and Vice Chancellor of Warwick University, said: “Higher education has to play its part and find its fair share of deficit reduction but we should not let the work universities and colleges do in driving economic prosperity be swept away by an avalanche of austerity. We are going to need to make major cost savings in the short-term, as well as grapple with longer-term arguments about the future of fees. The only way we will be able to afford to expand the number of students is if we offer a new type of degree.

“The current funding system privileges full-time residential courses supported by student loans. But this is not appropriate for many potential students, who want to study vocational courses in their local area, live at home and combine their studies with paid employment. So universities and colleges should be able to offer a new £5,000 fee degree, focused on vocational learning and offered to local students who would be eligible for fee loans but not maintenance loans or grants.”

The report says that the current student funding system is unsustainable. It shows that there is a black hole in the current system which could be as big as £1bn. The Commission uses new modelling to show that a more accurate estimate of the total value of student loans that will go unpaid is for 40 per cent of the total value of loans. The Government first predicted that it would be 30 per cent but amid concerns that this was an underestimate, subsequently raised this to 32 and then 34 per cent.

The Commission’s report says long-term reform is needed and models five options for change. But it makes clear that none of these reforms to the student funding system will help save money in the short term and warns that they cannot be used to help higher education make spending cuts in the near future. Because of government accounting rules, any short term changes would also have implications for the size of the deficit and would therefore need to be covered by revenue streams from alternative sources. The report models how each option compares to the current funding system, the impact on graduates, and the implications for government finances over the long term:

Raising the top rate of interest on student loans to 4.5 per cent. This would bring the estimated non-repayment on student loans down to 33 per cent and reduce the long term cost of the loan system to the government by £679m. Lower the maximum tuition fee to £6,000, while increasing direct government support for university teaching. This would require the government to invest an additional £637m in university teaching over the long term. It would reduce the long term risk of the funding system, as a greater share of the government’s contribution would be upfront. In the short term however it would require £1.67 billion in revenue from other sources to compensate universities up front for lost fee income.

Lower the maximum tuition fee to £6,000 funded by changes to the terms of student loans. The government could lower the tuition fee to £6,000, but it could fund this by altering the repayment terms of the student loan. Lowering tuition fees to £6,000 could be cost neutral to the Treasury if the top rate of interest on student loans is raised to 4.6 per cent, or if the threshold at which graduates start to repay their loans is lowered to £17,120. Although fiscally neutral in the long term in the short term this option would also require £1.67 billion revenues raised from elsewhere to compensate universities for lost fee income. Fund tuition through a mixture of student loans and means-tested family contributions. The government could ask more affluent families to take out lower student loans, and pay some of their tuition cost through an upfront fee instead. This would relieve some pressure on the student loan system and could save the government £486m in the long term.

A graduate tax. The Government could abolish the student loan system, and replace it with a higher rate of tax for anyone who participates in higher education. In order to maintain the current level of resource flowing to universities, this rate of tax would need to be an additional 1.96 per cent on all taxable income above £10,000 for a period of forty years.