The Free Market's Partied Too Hard at University

(Bloomberg Opinion) -- The defining economic and political shift of modern times has been the spread of financial and market-based principles to new parts of society. It’s long been a feature of higher education in the U.S., where student debt has surpassed $1.5 trillion. Now, England is trying too. 

Considering its small population, England boasts a remarkable number of the world’s top-ranked universities, leading an enviable system of tertiary learning. These schools, once proudly independent, are fast becoming businesses beholden to market forces. Several have issued bonds. Sadly, this process of “marketization” is also undermining the very people and public policy goals it was supposed to support. England’s universities are now among the world’s most expensive.  

The Free Market's Partied Too Hard at University

How did this happen? Successive U.K. governments backed the expansion of higher education over the past twenty years. This was a noble aim: on average graduates earn about 40 percent more than non-graduates. About half of youngsters in England now enter higher education, compared to less than one fifth in 1990. 

“Consumers” of higher education, not taxpayers, were asked to pay for this transformation,on the basis that they’re the ones who benefit most from it. Instead of institutions depending on government grants, students now receive loans to cover tuition and living expenses. The hope was that universities would compete to attract these rational consumers, which in turn would drive quality improvements and reduce costs.

This largely hasn’t happened. Almost all universities now charge the maximum permitted annual fee – 9,250 pounds – because doing otherwise might indicate they’re providing an inferior product. On average, students in England now graduate with about 50,000 pounds ($64,000) of debt with interest accruing at an eye-watering rate of up to 6.3 percent. In contrast, recent U.S. graduates have debts of about $37,000 on average. It’s a pretty crummy starting point for saving for retirement or to buy a home.

The Free Market's Partied Too Hard at University

Why aren’t undergraduates (or their parents) more price-sensitive? Young people often make the life-changing financial decision to attend university on the basis of pretty limited information, and then are stuck with their choice. Furthermore, more than 80 percent of students will never have to repay the full amount of their loans, because their earnings won’t be high enough – unpaid balances are written off by the government after 30 years. The projected losses don’t show up in the budget deficit until then, which means today’s taxpayers don’t feel pinched (and hence don’t kick up much of a fuss).  

Because more university funding is linked to students, it’s only natural that they try to recruit as many as possible.   

There’s evidence of a “bums on seats” market mentality: only one third of students think their course offers value for money (in 2012, when fees were lower, the figure was 50 percent). Meanwhile, more than one-fifth of students received at least one unconditional offer this year, meaning they could flunk their final school exams and still get in. 

The Free Market's Partied Too Hard at University

Fee-paying students also expect a return on their investment. Unsurprisingly, universities are handing out first-class degrees (the highest grade) like they’re going out of fashion. This could be students working harder – or universities avoiding the exacting standards that could deter income-generating applicants. 

The Free Market's Partied Too Hard at University

About three-quarters of students report they don’t receive enough information on how their fees are spent. Clearly some is going on marketing, and a lot on infrastructure, plenty of which is purely cosmetic – fee-paying students demand shiny new facilities. The salaries of university bosses have also exploded: several vice-chancellors now earn more than 300,000 pounds a year, which is pretty hard to stomach considering how graduate incomes have stagnated since the financial crisis.  

The Free Market's Partied Too Hard at University

These problems have provoked plenty of hand-wringing and a government review. The head of the National Audit Office warned that if higher education “was a regulated financial market we would be raising the question of mis-selling.” 

For some, the answer is to double down on the free market, perhaps by scaling fees to better reflect costs, or anticipated earnings. But this could discourage people from studying subjects the government wants to promote, or poorer people from choosing more expensive courses.

The Free Market's Partied Too Hard at University

A better solution might be to rethink whether higher education should even be a market. In Germany, where my family lives, students don't pay tuition fees.  That’s partly because this country, wisely, traditionally placed more emphasis on technical and vocational qualifications. Unlike Britain, Germany’s budget is also in surplus, which reduces pressure to alter the status quo.

Taxpayer-funded tuition reflects a broader recognition that tertiary education is a public good, rather than a purchasable commodity to be judged only on its capacity to lift a graduate’s paycheck. Sadly, England seems to be losing sight of what a university education is for.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

©2018 Bloomberg L.P.