Higher Education Strategy Associates

Initial Effects of a $9000 Tuition Hike

It’s been nearly two years since the U.K. government announced radical new tuition plans. From a little under 3300 GBP/year, the government allowed institutions to raise fees up to 9000 GBP. Loans rose to compensate, but grants did not. “Top” universities – essentially, any institution with pretensions to graduate education – all hiked their fees to the maximum; others, sometimes in response to some frankly weird government incentives, kept them a bit lower. Average tuition paid by U.K. students rose to 8,527 GBP – a jump of 158%. In Canadian dollars, that’s a jump of $8300 (exchange rate) to $10,000 (Big Mac Index PPP rate) per year.

This is a perfect – really, perfect – natural experiment for the effects of a tuition fee hike. The increase in loans means students face no additional liquidity constraint, i.e., they had exactly the same amount of cash-in-hand as before; meanwhile the net price is rising dollar-for-dollar with tuition because there are no offsetting grants to speak of. We also have great counter-factuals, because tuition in Northern Ireland, Wales and Scotland did not experience a similar increase in fees.

So, what were the outcomes of this experience?

We’ve known for a while that applications fell as a result of the hike. But thanks to a new report from the University and Colleges Admission Service, we now know much about the composition of the effects.

· The differential effects were almost entirely age-driven. Among 18 year-olds, the drop in applications was one percent – two percent if you measure against trend. Amongst over-19s, the drop is 15-20%. (This is pure Human Capital Theory, by the way – there’s a reason Becker got the Nobel.)
· There were no differential effects by family background. Amazing but true.
· There was no change in the pattern of applications by tuition fee – those institutions that kept prices low did not see a rush of new applications, nor did higher-tuition institutions see a fall in low-income applicants.
· There was no change in the pattern of applications by expected returns – programs with low post-graduate incomes saw no fall in applications.

This is going to bust a lot of sacred cows. On the left, people are simply going to have to deal with the fact that tuition increases just don’t have the huge scary effects everyone thinks they do – in fact, among traditional-aged students, the effect is close to zero. But there are problems for the right, too. Student insensitivity to price means that a lot of the rhetoric about higher fees bringing “market discipline” to students (in terms of course choice) and institutions has to be discarded.

Wouldn’t you love to hear some Quebec student leaders explain this one away? Evidence is so inconvenient.

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10 Responses to Initial Effects of a $9000 Tuition Hike

  1. Excellent research and insight. Reinforces the Robert Zemsky-like arguent that there is difference between expense and affordability. This type of daily blog is very helpful. Well done.

  2. David says:

    Isn’t the real effect of a significant increase in tuition felt, after graduation? Arguably, students are always going to take out larger loans in order to pay for the rising costs of post-secondary education – because post-secondary education is fast becoming the gate keeper to receiving full time employment in many fields.

    The real issue occurs after graduation. Ignoring the fact that the standard of living will almost certainly decrease for graduates, since their expendable income will be tied up with student load payments – think about the marco effect this will have on the economy. You will have a whole generation not spending. The ability to buy houses, new cars, new furniture, goods and services will arguably decline. How can anyone afford a new car or house, when they are tied up with student loans? Of course, they can take out even more loans…which only compounds the issue further.

    Lets look at tuition increase as a long term issue, and not just as a barrier to enter post-secondary education. No generation has ever faced the debt load our current generation is being put under, and we do not have a choice. If you want to receive a job in the current market – you must attend post-secondary education.

    • Alex Usher says:

      Hi David. Thanks for reading our stuff.

      You’re not wrong to say there are longer-term outcomes to worry about, but you’re forgetting the costs of the counterfactual. Sure, loans take money out of the economy in the future. But they put money *into* the economy in the short term. Or, to put it another way: we could increase future consumption by lowering debt today, but only at the cost of lowering *present* consumption through higher taxes. (There are some other inter-temporal issues to worry about, but that’s the main one).

      The only way you avoid that trade off is to reduce the cost of higher education as well as the price. But that means getting to grips with some pretty nasty productivity issues.

  3. This is interesting but it raises a question. My understanding (perhaps incorrect) was that English universities were already not attracting students from low income families and that this was a marked difference between England and other countries, such as Canada. If that is the case, the fact that number of low income students neither rose nor fell takes on a different significance since they were not there in the first place. I would be interesting to compare the student demographic in England with that of other places, including Quebec, Ontario and other provinces.

    • Alex Usher says:

      Hi Pamela. Thanks for reading our stuff.

      UK institutions – whether England or in one of the other “nations – attract relatively fewer (not “none” – fewer) low-income students, it’s true. Social mobility generally there is not what it is here, for reasons quite unconnected to tuition – it’s just a lot more stratified as a society. I’m not sure why that would change the price-response of any given student, though. Can you elaborate a bit?

  4. Carrie Hunter says:

    Hi Alex et al. Fascinating stuff. I am writing my dissertation as a critical analysis of OECD discourse on Higher education and would love to get my eyes on the data/study that you refer to in this blog. Can you point to it for me?

    Some of the things I want to know include: Are the loans repaid on an income contingent basis and are they openly available or means tested? If means tested, is it the students’ incomes that qualify them or the families’? Do loans also cover the costs of living arrangements? If families’ incomes are the qualifying variable, I wonder about those families who do not ‘qualify’ and yet still can’t come up with that kind of cash, particularly if they also have to cover residence fees and supplies. There are a lot of variables involved.

    And I too, have a concern similar to that of Pamela. If we want to encourage greater participation rates for the socio-economically challenged (and other under-represented groups) it MIGHT be that although increasing the tuition rate didn’t reduce their participation, reducing it instead could increase their participation.

    I also am concerned about the long-term effects regarding student employment during their studies. I wonder if students with higher debt loads will have to work more during their study period, contributing to lower achievement and perhaps even lower graduation rates. I personally have to work 3 part time jobs while studying and find it rather challenging, to say the least.

    thanks for the thought provoking information.

  5. Alex Usher says:

    Hi Carrie.

    You should be able to access the report by clicking on the highlighted (hyperlinked) text in the blog itself, but in case that’s not working, the report is at: http://www.ucas.ac.uk/documents/ucas_how_have_applications_changed_in_2012.pdf.

    UK loans are income-contingent, non-means tested, and do not cover living expenses (there is a separate set of maintenance grants that can cover some of that – see here: http://www.direct.gov.uk/en/EducationAndLearning/UniversityAndHigherEducation/StudentFinance/Typesoffinance/DG_171557).

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