Higher education. University challenges

The birth pangs of a market in higher education

STUDENTS heading to university this autumn will be the last members of a dying system. From 2006, the government will no longer be fixing fees, today roughly £1,200 a year for every course in every English university, regardless of demand, quality or cost to the university. Instead, institutions will be able to set their own fees, up to a maximum of £3,000 a year.

As student numbers have increased, government funding per head has dropped catastrophically. Universities offering expensive courses and small-group tutorials have subsidised their teaching by raiding research and maintenance budgets. Some departments have closed - 19 fewer institutions offer physics degrees now than in 1997 - and salaries for academics have fallen behind those for other similarly qualified professionals. Realistically, the only way to make ends meet was for students, who are, after all, the main beneficiaries, to pay more.

Labour MPs found a rise in fees hard enough to stomach. But what almost led to Tony Blair's first-ever defeat as prime minister at the hands of his backbenchers was the idea that different universities could charge different fees - which, they feared, would pave the way to elitism. The Higher Education Bill scraped through the House of Commons with a majority of just five in January 2004.

At a casual glance, much of the fuss now seems to have been about nothing. Only three universities will charge less than the maximum, so the principle of variability has not translated into practice. (Bargain-hunters might like to note that, at £2,000 a year, Leeds Metropolitan University will next year be offering the country's cheapest degrees.) In part, this is because the cap is too low - many elite universities say they will still lose money teaching undergraduates. But it is also because universities, reluctant to admit that not all institutions and degrees are of equal value, are afraid of damaging their brands.

So it is encouraging that a few brave institutions are experimenting with pricing and incentives. For example, after this year's exam results were released, the University of Bradford announced that it would be giving £500 scholarships to new computer-science students. The university is looking to fill places through “clearing”, the process whereby students who missed the grades they needed for their preferred courses can apply for vacancies on less popular ones.

But the elite institutions will still be faced with the problem of how to cover the cost of teaching undergraduates. Up till now, the favourite tricks have been to use research money to prop up departmental budgets and to recruit large numbers of overseas students, who can be charged whatever the market will bear. (As a result, the elite universities are taking in ever more of them; Oxford is even planning to cut down on the number of home students to accommodate them.)

The obvious solution - charging more - will still be impossible because of the low cap on fees. The next most obvious - expanding popular courses where the cost of teaching extra students is low - will also be difficult. Universities are meant to recruit the “right” number of students, in effect, the same number as last year plus or minus 5%. If they recruit too few students they lose money; more surprisingly, the same happens if they recruit too many. Even under the new fee regime, students will be paying less than half the income associated with teaching, with the rest coming from government funding bodies. Not only will a university that overshoots its target numbers lose out on this government funding, but it may also be fined enough to recover the extra students' fees and maintenance grants. This is because the new fees and grants are to be paid up-front by the government and only repaid by students once they are working: in the short term, universities that over-recruit will be stretching the education budget.

It remains to be seen whether these penalties will in fact materialise. The government wants 50% of young people to go into higher education by 2010, a target it looks likely to miss by a mile. As long as overall numbers stay within planned levels, it may well turn a blind eye to universities that decide to increase student numbers taking the most popular courses. Some universities may be tempted to gamble on weaker institutions being unable to fill their places at the new higher prices. Until the cap on fees is raised - which the government has promised won't happen in the lifetime of this parliament - this will be the only way some universities will find teaching worth their while.

Whether or not next year sees top universities testing the possibilities for expansion, those at the budget end of the market are likely to have to cut their fees, offer bribes and hustle for custom. If students facing large debts decide that a so-so course at a so-so university isn't so attractive after all, there may be summer sales, with places going cheap in clearing, or perhaps early-bird discounts for students who make a particular institution their first choice. It's not too much of a stretch to imagine incentives for signing up a friend, or even “buy one, get one half-price” offers for siblings.

It may turn out that capped fees, central control over student numbers and all the paraphernalia designed to allow only a little room for enterprise do not work - that creating a half-market in university teaching is no more manageable than becoming a little bit pregnant.