18.1 Our vision is for a world class higher education system based on high quality learning and teaching, which combines rigour and economic relevance. In the previous chapter we estimated the future costs of such a system and identified a gap between those costs and the current level of public and private funding. We are convinced that the gap is real and cannot be closed simply by further efficiency savings on the part of institutions.

18.2 Throughout our report we have emphasised our belief that the long term wellbeing of higher education rests on establishing a new compact between society, as represented by the Government, students and their families, employers and providing institutions. Each member of the compact needs to play their part and we have shown in the preceding chapters ways in which this can be done. The compact implies that each of the stakeholders both contributes to, and receives benefits from, higher education. This notion is represented schematically in Table 18.1 below.

18.3 In this chapter, we consider the compact in relation to paying for higher education. To establish how each group might reasonably be expected to contribute to the costs of higher education, we therefore consider:
  • who currently pays for higher education institutions;
  • who currently pays for students to attend higher education institutions;
  • who currently benefits from higher education;
  • who should pay for higher education in the future.

18.4 We also consider how far the contributions of the stakeholders, taken together, may be expected to meet the overall growth in funding which is needed to bridge the funding gap.

Who currently pays for higher education institutions?

18.5 The sources of income for higher education institutions’ activities are shown in Table 18.2.

a. ‘Other’ includes ‘other general income’, and ‘other income for services rendered’.
b. A proportion of this will be met by employers.
c. There will be some contribution from employers included within the ‘individuals’ total including, in particular, fees for company-based training and continuing professional development.
d. There will be some scholarship income from charities probably included in the ‘other’ column.
e. Includes overseas student fees and contract services for core activities other than research. It will also include fee income from those on full-time undergraduate courses but not in receipt of mandatory awards.
f. Includes some activities which support teaching and research.
g. Includes income from health and hospital authorities for nurse training.
h. Income from catering and residence operations. A part of this will be from conference trade, and a part funded from student maintenance, including parental contributions.
i. Includes endowment income and interest receivable totalling 263m in 1995-96.

Public funding
18.6 This table shows that total income for higher education institutions from public sources in 1995-96 amounted to some 7 billion. This public funding is borne by those in all socio-economic groups as they contribute to general taxation. Nonetheless, it appears that the percentage of Gross Domestic Product spent on UK higher education is significantly lower than that of some of our major competitors (although with our relatively low dropout rates and short courses our system of higher education is more efficient). International comparisons of expenditure levels on higher education are not straightforward because of differences in definitions.

Private funding
18.7 Table 18.2 shows that higher education institutions already receive significant sums, about a third of their total income in 1995–96, from sources other than the Government. We recognise, for example, the funding contribution from employers. In addition to their contribution to fees for some part-time students, included in Table 18.2, employers contribute in ways which are not shown on the table, including:

  • supporting the living costs of some individual full-time undergraduates through sponsorship;
  • providing work placement opportunities for students on sandwich courses or projects for other students.

Who currently pays for students to attend higher education institutions?

18.8 A significant part of the total costs of higher education currently falls to individuals and their families, whether through meeting living costs in whole or in part, or the payment of fees towards the cost of tuition.

18.9 The parental/spouse’s contribution to students’ living costs is a significant source of private funding to higher education. Table 18.3 shows that parents/spouses were expected to contribute 700 million in 1995/96, under the current mandatory awards system with its parental means test. This averaged 760 per award holder.

18.10 In practice, the contribution by parents/spouses to students’ living costs tends to exceed the assessed contribution.1 Some of this parental contribution, as well as a proportion of the publicly funded support for maintenance, will be recorded within the 722m of income received by institutions from their catering and residence operations in 1995-96 (Table 18.2). These funds from students’ parents and spouses represent an important contribution to the costs of higher education. Indeed, we estimate that, if they are added, together with the public funds for maintenance support of some 2.1 billion, to the funding for institutions shown in Table 18.2, the total private and public income of higher education institutions probably increases by about 2 billion (after taking into account the double counting of expenditure on catering and residence in institutions) to at least 13 billion in 1995-96, or about 1.8 per cent of Gross Domestic Product.2

18.11 The contributions from public and private sector sources set out in Tables 18.2, 17.2 and 18.3 can be summarised, as in Chart 18.1.

Who currently benefits from higher education?

18.12 We have also considered who benefits from higher education. The benefits of higher education are not necessarily shared equitably between those who currently pay for it. Who benefits depends strongly on the activity concerned. The main beneficiaries of higher education tuition, for example, differ from the main beneficiaries of higher education research.

18.13 As we say in Chapter 6, the evidence of measurable benefits from higher education shows that graduates are certainly major beneficiaries. The studies reported there demonstrate a strong link – in aggregate – between participation in full-time undergraduate education and the relative subsequent earnings potential of an individual. Compared to those without higher education qualifications who were qualified to enter higher education, those with higher education qualifications:

  • have higher employment rates;
  • enjoy higher salaries;
  • enjoy an average private rate of return of some 11 to 14 per cent.

18.14 This provides a strong positive incentive for individuals to commit themselves to a programme of higher education. Accordingly, we suggest in Chapter 6 that such information should be generally available to students, and will be a key factor in sustaining high levels of demand for higher education. We have summarised the overall position. Not all individual graduates will benefit to this extent.

18.15 As we described in Chapter 6 we are persuaded that those with higher education qualifications will continue to enjoy salary premia over those without, even with a significant increase in the numbers of graduates. This is certainly the lesson of the North American experience, where there continues to be significant labour market benefits for graduates.3

18.16 We also noted in Chapter 7 that the pattern of participation in higher education by those from different socio-economic groups does not currently reflect the socio-economic composition of the population. Those from socio-economic groups IV and V have much lower participation rates than those from socio-economic groups I and II. The benefits of participation which flow to those with higher education qualifications are thus distributed unequally across the population.4 However, as we showed earlier, whereas public funding for higher education is drawn from the whole population through general taxation, benefits go primarily to those from socio-economic groups I to IIIn. The one exception to this pattern is the maintenance grant which, because it is means tested, benefits students from lower income households. Its current value is about 1 billion a year. We say more about this in Chapter 20.

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