The Thought Office

In the UK, where tuition fees have risen dramatically from around £3000 to £9000, resentment for the coalition has grown similarly. But can the state afford to keep subsidising the cost of degree-level education? Why does the state even become involved? And could the private sector offer any alternatives?

Bulging Government Debts

Western governments expanded their spending in the aftermath of the financial crisis in 2007-08, taking up the slack from weak consumer demand. However, the economic climate remains precarious. And the big stimulus packages which leaders had bet on now leave them grossly over-stretched.

At this time, most policy makers would have expected to be well into a healthy recovery. This would raise tax receipts, bringing governments’ balance sheets back into order. Unfortunately, we are still stuck in these economic doldrums with anaemic growth across the developed world and the continuing euro saga. All of this has highlighted how governments are spending well beyond their means at a significant cost to future growth prospects.

George Osborne, the chancellor of the exchequer in the UK, has reduced government investment into tertiary education, leading to higher tuition fees. This has caused considerable angst amongst students, leading to the severe riots earlier in the year.

The problems with high tuition fees

Higher fees means those from poorer backgrounds are less able to benefit from a university education. Moreover, those who do go on to study at university-level will be shackled to a massive debt burden for a significant proportion of their adult lives.

Especially after the housing bust, prospective home owners will be asked to place a much greater down payment. With such large student debts, many young people will struggle to find good mortgage terms and subsequently get their foot on the housing ladder. As a result, some economic commentators have raised concerns that in the medium-term, people will be less affluent than the previous generation - breaking what many people see as the nation’s social contract.

Hiking tuition fees will exacerbate the rich-poor divide. Students from wealthier households would be able to afford the greater cost of university and benefit from the higher salary later. This contrasts to poorer students who, deterred from higher education due to the enormous costs, would earn far lower salaries than their more affluent counterparts.

Let the private sector step in

The main reason that governments become involved in improving the education of their citizens is that more knowledgeable, evaluative and critical individuals offer positive externalities - that is, benefits to wider society along with the individual who receives higher-education. More educated individuals earn more, providing larger tax receipts which governments can use to improve social infrastructure; graduates are also meant to be an innovative bunch, hopefully providing new goods and services that improve our quality of life.

Although the government may cut spending on education, that doesn’t mean that the provision of education at a higher level will fall. I propose that the private sector step in to sponsor individuals. Firms would be willing to support students if they assume a job at the company after their education or training.

This would allow poorer, but still able, students to benefit from degree-level education. Moreover, it would allow the supply of graduates to better meet the demand of businesses, providing a more productive labour force. Especially now when there is a massive shortfall in the supply of graduates in Science, Technology, Engineering and Mathematics degree, private firms would offer sponsorships drawing capable students to courses which are in actual demand.

Allowing the private sector to assume some of the roles of the state in providing education resources is certainly an untested policy area in recent years. Perhaps now, when governments are on the brink of bankruptcy, encouraging such schemes - which would ease the pressure on the state - has very little to lose.