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Over the last 10 years or so, universities in England have been working in a relatively favourable environment. The rise in tuition fees to £3,000 in 2006/2007 and then, for most universities, to £9,000 in 2012/2013 helped increase incomes with little effect on student numbers. There are several reasons why the increase in the cost of higher education for students has not been associated with a significant reduction in the number going to university.

One reason is that the cost of higher education still represents a relatively small proportion of the earnings that students might expect to earn over their lifetimes. A second reason is that the number of young people leaving school has risen steadily over the last 10 years with the result that there has been a steady rise in the demand for higher education. The number of students that universities can recruit is still controlled by the Higher Education Funding Council for England and in some years, most notably in 2009, the number of qualified applicants significantly exceeded the supply of places.

However, it is likely that the environment facing universities will be more difficult over the next few years. Firstly, as reported in The Guardian, the income stream that government is receiving from student loan repayments seems to be less than anticipated. This is increasing the cost to the government of funding higher education. The cost of funding higher education is measured using what is termed the resource accounting and budgeting (or RAB charge) which is usually expressed as the percentage of the current value of tuition fee loans made to students that will not be repaid.

At present, the tuition fee loans made by government to students have a value of around £10bn each year. When students leave university and start paid work the taxman deducts 9% of their salary above £15,000 once they are earning over £21,000 per annum. If the loan has not been repaid after 30 years however, the outstanding debt is written-off. The government forecast of the RAB charge using data on the earnings of graduates over the period from 1990 to 2008 was that it would be between 35 and 40 percent.

{mbox:lightbox/mens-wages-uk.jpg|width=300|height=225|caption=Click to enlarge|title=Male average earnings following graduation}

The figure on the right shows the paths of nominal earnings that male graduates in the different deciles of lifetime earnings were expected to follow over the next 30 years. In particular, the figure shows that earnings were expected to grow rapidly over the first few years after leaving university. The Guardian notes that over the last 5 years the rise in graduate earnings has been significantly lower than expected and, in consequence, the RAB charge is now estimated by government to be around 45%. If the government can’t get its money back from students it is likely to cut other areas of higher education spending and last month announced that the amount universities get from government to fund teaching would fall.

The second change in the environment facing universities is that the number of 18 year olds in England is going to fall significantly over the next 10 years. In many other circumstances, a decrease in the number of teenagers might not be a cause for despair but, for many institutions, a fall in the number of admissions would not be good news. Overall, population forecasts suggest that the number of young people in England will fall by around 11% from 670,000 to around 600,000 between 2011 and 2021. The magnitude of the fall in the number of young people is likely to vary from place to place, however, and because around 50% of students go to a university in the same region as they grow-up, some institutions will be more affected than others.

{mbox:lightbox/population-plots-uk.jpg|width=300|height=225|caption=Click to enlarge|title=Predictions of population aged 18 to 20 Years major urban areas in England}

The figure on the right shows how the number of young people who are 18 years of age is predicted to change for the NUTS 2 areas which contain England’s core cities. The figure shows that the areas with the lowest rate of decline in the number of young people include West Yorkshire (-9.2%) and Inner London (-6.6%) while Merseyside has the highest rate of decline (-22.2%).

The government needs to think carefully about how it responds to the challenges facing higher education. The robustness of most institutions to change over the last 10 years can be seen as partly a result of having been operating in a favourable environment, rather than due to factors specifically within higher education.

Because the environment is likely to be less favourable over the next 10 years it is possible that relatively small changes in how higher education is funded could have a larger than anticipated impact on many institutions. Whether policy makers understand this and try to give the sector some degree of stability remains to be seen.

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