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



1. Introduction

The Higher Education Act of 2004 introduced a set of substantial reforms to the
system of higher education (HE) finance in England. These reforms, which included
an increase in fees, income-contingent loans (ICLs), and means-tested grants and
bursaries, were preceded by lengthy discussions on the relative merits of alternative
funding systems.
2 Among the desired elements of the reforms that emerged from this
debate were (i) that a greater share of the costs of HE be borne by graduates, the main
beneficiaries of HE (ii) that the system include an insurance element to protect
graduates against low realised returns from HE, and (iii) that universities see
increased funding per head. Further refinements to these reforms were announced in
July 2007.
3 The 2004 reforms came fully into operation in September 2006 and the
latest refinements will apply to students starting from September 2008.

This paper assesses the extent to which the new reforms are likely to realise the above
aims. We start off with an analysis of the distributional effects of the reforms by
student parental income. This reveals that the poorest students gain the most from the
reforms, due to generous maintenance grants and subsidies outweighing the total costs
of entering university, and that students from relatively well off backgrounds will
typically face higher net costs of HE. As the amount that graduates pay for HE will
depend on the amount and timing of their lifetime earnings, we then consider the
distributional effects of the reforms by graduate lifetime earnings. This analysis
makes use of a new set of simulated earnings profiles, developed in Dearden et al.
(2006), that account for earnings mobility and spells out of work, explicitly capturing
the notion that some graduates will experience better labour market outcomes than
others. We find that relative to the system that was replaced, graduates with the lowest
lifetime earnings can expect to see a reduction in the cost of HE, while higher earning
graduates will contribute more to the cost of their HE. In this way, we find that the HE
reforms do in fact include a substantial insurance component. We conclude by taking
a look at how the reforms affect university funding and how they shift the balance of

2 For an overview of the key elements in this debate see Barr and Crawford (2005) and Chapman
(2005).

3 See John Denham’s statement to the House of Commons on 5 July 2007,
http://www.dti.gov.uk/science/page40318.html.



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