Fees Please: A Conversation with Nicholas Barr about Higher Education Funding in Europe and North America
Published on: Sep 11, 2006

Nicholas Barr is a professor or public economics at the London School of Economics and Political Science. Dr. Barr has been active in the UK debate on higher education since 1988, advocating a wide- ranging system of income-contingent student loans. He has submitted invited evidence to the Dearing Committee and the Education Select Committee, was an adviser to the Australian West Committee, has contributed to policy formation in New Zealand, and has advised the Hungarian government.  

Nicholas Rice: You have previously criticised the centrally planned model of Scandinavian higher education as inadequate for a globalised, diversified society. You have also, however, advocated expanding student numbers as a means of preparing the workforce for the challenges of globalisation. What do you think the Anglo-American model can learn in this respect from Scandinavian countries, where in 2001 the probability of a 17-year-old entering university before the age of 30 was over one and a half times greater than in the UK and the US?

Nicholas Barr:
The Scandinavian record on the extent and social equity of participation is distinguished. In my view (though I am no expert on Scandinavia) the roots of this outcome include an expensive but highly effective system of pre-school education and a political economy that tolerates high taxation as the price of social equity.

The first element helps to explain why socioeconomic inequality in Scandinavia is lower than in most countries and considerably lower than in the UK (which has a shameful historical record in respect of participation in higher education by people from poorer backgrounds). The second element helps to explain why Scandinavia can afford public finance of a high quality education system, including higher education.

There are several reasons why this model might not transfer to other countries. Firstly, global competition might exert downward pressure on taxation and possibly erode the social contract in Scandinavia. Secondly, the fact that the model works in Scandinavia does not mean that it will necessarily work in other countries whose current and future limits on taxation will be different. The political economies in the UK and in the US definitely will not tolerate taxation at the Scandinavian level. Lastly, diversity and quality are best assured by regulated competition, as the matter is already too complicated for even the best-informed central planner.

My conclusion is that the right lesson to draw from Scandinavia is on pre-school education; over time they will almost certainly have to move in the UK direction on higher education.

The Centre for European Reform recently observed that EU countries would need to spend close to 2 percent of their GDP on higher education in order for EU higher education to compete with the best in the world. The UK spent 1.0 percent of its GDP in 2000 on higher education, while the US spent 2.7 percent and Finland and Sweden spent 1.7 percent. Should the UK government step in to close that type of gap, or should the costs be covered by further fee increases or even a new system of tax-deductible donations?

NB: My short answer is that the US spends an inefficiently large amount, the UK an inefficiently small amount. Before giving my longer answer, I have a caveat: it is not possible to quantify in a definitive way what the efficient volume of resources to devote to higher education should be, not least because the quantitative link between investment in human capital and higher individual productivity is not a simple one.

The US spends an inefficiently large amount. As with health care, this is in part because the government does not take sufficient account of market failures and hence does not get involved even in areas where its involvement could improve efficiency.  

For example, alongside the education they provide, elite universities also sell a positional good – membership of the student's peer group. They thus have a significant monopoly element, which partly explains fee levels at the US Ivy League universities. In part, the resulting income is spent on facilities for students and faculty that are utterly wonderful but not an efficient use of scarce resources. Gold-plated dorms (to exaggerate) are not critically necessary for a good student experience.

Europe spends too little, mainly because of excessive reliance on taxpayer funding. The taxpayer could afford a high-quality university system when the system was small. But as higher education has expanded funding has not kept pace, not least because of other demands on scarce fiscal capacity, examples being population growth and technological advances in health care.  

How should the gap be filled? In my view, the income of a university should derive primarily from its core activities – teaching and research. Thus a large part of the gap should come from tuition fees, supported by a wide-ranging system of scholarships and a well-designed system of student loans. Donations are fine as far as they go, but even in the US only a few institutions receive substantial sums that way.  Donations are the tail, not the dog; policy should not get the two confused.

NR: Should tuition fees always be controlled to ensure that they produce an equitable gap in loan repayments and hence in salaries, or might uncontrolled pricing might become acceptable in the foreseeable future?

NB: In general, prices should be set for efficiency reasons. If something is scarce, its price will be higher. The way to protect the poor and satisfy equity arguments should generally be to subsidise incomes rather than prices. Thus the argument about fee levels should be couched in efficiency terms. The way to promote access is not through subsidised fees – largely a middle-class subsidy – but through other, more powerful instruments.

Why does the UK have a fees cap?  The cap should be high enough to bring in extra resources for universities and to strengthen competition, both of which benefit students, but low enough so that the political settlement sticks and to allow universities whose managements have little experience of a competitive environment time to develop the necessary expertise.

Should there always be a fees cap?  I favour a continued fees cap, or government controls in some other form, because the elite universities have monopoly power, just as they do in the US.

Thus my recommendation is that variable fees should be introduced but phased in. Economic theory points towards a regulated market, not an unconstrained one.

NR: You have criticised flat tuition fees as inequitable given that some universities and students have greater budgets than others. Flat charges have also caused disturbances in the UK, such as the riots over poll tax towards the end of Thatcher era. Why then did Parliament decide – against your recommendation – that the government should pay for the interest on all student loans and not concentrate on helping disadvantaged borrowers?

Flat fees are inefficient and inequitable. They are inefficient because institutions have different costs and offer different products, and reasonably well-informed consumers choose between them, so competitive pricing should encourage institutions to function more efficiently. They are unfair because it is wrong to force a student at Podunk University to pay the same fees as one at MIT. If I advocated champagne subsidies to improve access to champagne for poorer people, Labour MPs would rightly shout me down and tell me I was subsidising a middle-class perk – the argument for higher education is exactly the same.

Blanket-interest subsidies, it is argued, help poor students. This is wrong. They do not help students (graduates make loan repayments, not students), and they do not really help low-earning graduates, whose major fail safe is that loans which are not repaid after 25 years are forgiven. The major beneficiaries are high-earning graduates in mid career, whose loan repayments finish sooner because of the interest subsidy than they otherwise would.

The argument that interest subsidies help to promote access is intuitively powerful, however, because it would be true if loans had mortgage-type repayments (e.g. $200 per month) rather than the income-contingent repayments (x% of earnings per month) that the UK has. Because of its intuitive power, most politicians believe it or, where they understand the real argument, keep quiet, because they know that most of their electorate believes it.

The government, then, retained the blanket interest subsidy for political reasons.  Ministers understood my argument and agreed with it; but it was felt that bringing in variable fees was such a huge political battle than any further reform would break the camel's back. That view was correct since at the crucial Parliamentary vote a potential government majority of 160 was pulled down to 5.

What would the political situation be like on the Continent if governments were to propose introducing the UK's current system of fees and loans?

NB: The short answer is: truly horrendous.

Social norms are enormously powerful.  In the USA everyone knows that you pay tuition fees at college and that fees vary across institutions.  In Europe everyone knows that higher education is free and that it is immoral to charge for education.  These views, though in my view misplaced and often muddled, are deeply held.
There are several rational counter-arguments to the European viewpoint. ‘Free’ higher education, however desirable, is not fiscally affordable in an era when there is an imperative to mass higher education. ‘Free’ higher education, moreover, is not free: it is paid for by taxpayers. And since the people who attend higher education are from disproportionately better-off backgrounds, taxpayer finance is pro-rich.

The morality argument is not as simple as it appears. To quote from my OXREP paper, ‘It is immoral (in my view) if people with the aptitude and desire are denied access to higher education because they cannot afford it; it is also immoral if underfunded earlier education means that they never even aspire to university. Similarly, it is immoral if someone is malnourished. But that is not an argument for making food free for everyone, including the rich; rather, it argues for income transfers so that everyone can afford a healthy diet’ (Barr, ‘Higher Education Funding’, Oxford Review of Economic Policy, Vol. 20 No. 2, 2004, p. 266).

Serious public debate on these issues may eventually provoke political action. It is surprising (and pleasing) how the UK debate on pension reform now allows serious discussion about raising the retirement age – something I was regarded as politically batty for advocating in the past. An EU-wide agreement on higher education should also take some of the heat off politicians like the Nordic education minister who told me a while back that she ‘could not use the word “fees” – it is a taboo word.’

NR: Beyond Britain, which EU countries have proved most vocal about reaching an agreement on the introduction of fees?

NB: In most countries, politicians are keeping their heads down over fees, hoping it won't become salient on their watch. There are exceptions, however. A landmark decision by the Constitutional Court in Germany in 2005 ruled that fees did not violate the constitution and therefore that the German Länder (the sub-national levels of government) were free to establish whatever fees regime they wished. In fact, a number have already done so.

I am not aware of other EU countries in Northern and Western Europe that have bitten the bullet on fees apart from the UK. However, in the former communist member states of the EU, fees are common. Most of those countries have private universities charging fees. In some, public universities can also charge fees; in others, fees at public university are illegal or unconstitutional, so that charges are not fees but ‘administrative costs’ or some similar device.

In Poland, ‘normal’ students have a constitutional right to free higher education, but the same is not true of other groups of students – evening students, for instance.  However, the constitution does not define ‘evening’, and thus so-called evening students, who pay fees, sometimes sit alongside regular students at lectures.

NR: Are education-related charges for foreign students undermining the increase in student mobility within the EU, for the purposes of both study and work, or are higher education institutions lowering fees for foreign students in an attempt to attract talent from abroad?

NB: The main impediment to student mobility in the EU is that there are very different systems across countries in (a) the way degrees are organised and (b) the way higher education is financed. In its efforts to integrate the various strands of EU higher education, the Bologna Process is getting to grips with degree structures, in particular aiming to make it possible to compare degrees and parts of degrees across different systems. The eventual aim is to make it easier for a student to get a degree involving study in more than one country.  

There is no comparable effort to make higher education finance mobility-friendly, however. The major incompatibility is that in most of the older EU member states tuition fees are low or largely non-existent, whereas in countries like the UK and some of the former communist countries fees can be substantial. A second problem is that a student from country A should be able to use that country’s student support to study in country B, but cannot. Thus much work remains to be done.