Higher education funding reforms in England: the distributional effects and the shifting balance of costs

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Higher education funding reforms in England: the
distributional effects and the shifting balance of
costs¹

Lorraine Dearden, Emla Fitzsimons, Alissa Goodman and Greg Kaplan

Submitted to the Economic Journal in October 2006; this revision September 2007.

Abstract

This paper undertakes a quantitative analysis of substantial reforms to the system of
higher education (HE) finance first announced in 2004 and then revised again in July
2007. The reforms introduced deferred fees for HE, payable by graduates through the
tax system in the form of income-contingent repayments on loans subsidised by the
government. Lifetime earnings that have been simulated by the authors using
innovative methods, are used to analyse the likely distributional consequences of the
reforms for graduates. It is shown that graduates with low lifetime earnings will pay
less for their HE than graduates higher up the lifetime earnings distribution compared
to the system operating before the reforms. Taxpayers will bear substantial costs due
to the interest rate and debt write-off subsidies. The extent to which the reforms are
likely to shift the balance of funding for HE between the public and private sector is
also analysed, as well as the likely distributional consequences of a number of
variations to the system such as removing the interest subsidy from the loans.

1This paper draws together recent work by these authors from a number of sources including: Dearden
et. al (2006), Dearden et. al (2005), and Goodman (2005). We are extremely grateful to the funders of
this work, who include the Nuffield Foundation (Grant number OPD/00294/G), the ESRC, through the
Centre for the Microeconomic Analysis of Public Policy at IFS (Grant number M535255111) and the
Department for Education and Skills (DfES) through the Centre for the Economics of Education
(CEE). We acknowledge useful comments from participants at the 2^nd Mass Higher Education in UK
and International Contexts Seminar in February 2007; the 2006 Royal Economic Society Annual
Conference; the Department for Education and Skills CEE conference in June 2007; the Geary
Behavioural Seminar series at University College Dublin; the Nuffield Foundation Education Seminar
on 24 May 2006; the 2006 Arne Ryde Symposium on Higher Education Finance at Lund University
Sweden; and the Poverty and Applied Microeconomics seminar at the World Bank, May 2005.

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