Saturday, 19 February 2011

How much will it cost to go to university?

Anyone planning to invest in a university degree must first ask what is the value of higher education?  Its value is relatively subjective and therefore difficult to answer, but it is directly related to cost.

There are several factors that shape price, primarily supply and demand.  Ifdemand increases and there is a shortage of supply, price increase.  Higher education has been significantly oversubscribed in recent years, but that reveals nothing about the quality of the applicants.  Universities are in fierce competition to attract the most talented students, of which there is a shortage.

Another consideration is that of Veblen goods; commodities whose demand increases as the price rises.  For example a designer sweater may essentially identical to a high street equivalent, but its inflated price increases its desirability by inferring status.

Universities will also be incentivised to charge more by the government.  Leading universities have arbitrary Widening Participation (WP) targets upon which some of their funding is contingent.  In its simplest terms, Widening Participation is attracting high achieving students from less advantaged backgrounds.
Any university that charges above the minimum has to commit to spend a proportion of this additional fee income on WP activities.  Charging higher fees will not only bring in more money directly but potentially unlock the additional funding that is linked to WP.

How much will it cost to go to university?  The short answer is more than £6,000.  The University and College Union predicts that every university will have to charge at least £6,863 per year to maintain funding levels.

This suggest that most the Million+ universities will charge somewhere between six and seven thousand, depending on how difficult they are finding it to attract quality applicants.  These universities rarely struggle to meet WP targets, so that consideration is unlikely to shape their price.  But they will have to charge less than the Russell and 1994 Groups to remain competitive.

Oxford and Cambridge have already set their fees at the maximum £9,000.  The rationale for this is simple.  By charging the full fee Oxbridge is inferring that their ‘product’ is of the highest quality.  Oxbridge rarely struggles to attract high quality applicants, so there is a clear lack of supply that is driving demand which is in turn driving price.

The Russell Group has suggested that they will have to charge at least £7000 to maintain current funding levels.  My prediction is that both the Russell and 1994 Groups of universities will charge approximately £8,000, moving all of the top universities towards the higher end of the fee bracket.  These universities will price themselves relative to Oxbridge; charging significantly less could suggest a lack of quality.

Universities can’t discuss prices with each other, this is anti-competitive.  If direct competitors charge less than their rivals it could affect the perceived value of their degrees; erring on the side of caution may inflate the price.  Under the current funding arrangement every single university charges the highest fee possible, the one university that bucked this trend found itself in financial difficulty.

The coalition government expects most universities to charge £6,000 per year.  Sadly all the evidence suggests that, despite the rhetoric, this is highly unlikely.  One suspects the fee debate has a long way to run yet.

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