Kodde (1986). There is more recent work on the design of an optimal education
finance system in the presence of uncertainty over the benefits of education, such as
by De Fraja (2002), Benabou (2002) and Fernandez and Rogerson (1995), though the
exact link between theoretically optimal systems and ICLs in practice is an area of
open research. Our work adds empirical evidence to this largely theoretical debate.
The paper proceeds as follows. Section 2 briefly describes the HE reforms. In section
3 we consider how lifetime payments of HE depend on parental income, and set out
the distributional implications of the reforms along this dimension. Section 4 assesses
the distributional effects of the reforms on graduates according to graduate lifetime
earnings, and sets out the likely distributional consequences of a number of potential
future reforms, including increasing the fee cap and reducing loan subsidies. Section 5
shows how the new system of HE funding alters the balance of funding between
graduates, students, universities, and taxpayers. Section 6 concludes.
2. The 2004 reforms
The recent reforms to the funding of HE in England originated with the Department
for Education and Skills’ White Paper published in January 2003, which set out plans
for increasing fees for higher education, together with full fee deferral and the re-
introduction of means-tested grants for student support. The full reforms, somewhat
altered since the publication of the White Paper, came into effect in England in 2006.
Further changes to the system were announced in 2007, mainly affecting upfront
support for students, which will affect students starting university from 2008-09.4 In
this paper we analyse this most up-to-date HE funding system (for ease of notation we
refer to it as the “new system”). One of the key motivations for the reforms was to
reverse the long-term decline in funding per head for university teaching seen in
England over a number of decades, by increasing graduate contributions.
Compared to the system it replaced (referred to for convenience as the “old system”),
maximum fees are higher - with fees variable, up to a £3,000 cap, which will remain
4 See John Denham’s statement to the House of Commons on 5 July 2007,
http://www.dti.gov.uk/science/page40318.html