The Redistributive Effects of British Subsidies to Higher Education
Post based on a recent article in Social Policy and Society
While a well-educated population is socially desirable, a university education confers significant private benefits on its recipient as well. Therefore, the question of who should bear the cost of higher education is an interesting one, as there is a trade-off between making higher education accessible to low-income students and securing appropriate financial contributions from high earners who benefited from university education. The cost of obtaining an undergraduate degree has historically been quite subsidised in the UK, but following controversial reforms in 2010, students in English universities have faced fees of up to £9,000 per year. While these reforms were motivated primarily by fiscal considerations, they also have the potential to render higher education finance more progressive.
A recent article by Elizabeth Mishkin and John Straub in Social Policy and Society examines the distributional consequences of a heavily subsidized higher education system. The analysis makes use of mid-career earnings data on individuals who would have been of typical university age in the 1990s in order to estimate lifetime earnings of graduates and non-graduates. The results indicate that the pre-1998 system was regressive; that is, low lifetime earners were net contributors to the higher education system, while high earners were net beneficiaries. This pattern stems from the authors’ estimates that nearly all university graduates in this period would receive more in direct subsidies as students than they would ever pay in taxes toward the higher education system. At the same time, non-graduates receive negative net subsidies because of their tax contributions to the costs of higher education. Since university graduates tend to earn more than non-graduates, the authors conclude that, over the life cycle, British higher education subsidies amounted to transfers from low-income to high-income groups.
Prior to 2010, fee increases and other reforms – particularly the introduction of income-contingent loan repayments – improved progressivity among university graduates, but with the side effect of increasing taxpayer spending on higher education. By contrast, England’s 2012 reforms take further steps to increase progressivity among graduates, while also attempting to rein in public spending. The analysis provided by Mishkin and Straub does not settle the difficult normative question of whether these reforms improve social welfare, but does serve to call attention to the negative distributional consequences of pre-reform subsidies.