Wednesday, July 13, 2011

Britain struggles to price education correctly

I wrote yesterday about the contrarian move in Germany to make university education free. The UK moved the other way in Tony Blair's time by opting for more market-driven fees. The new government opted to stay the course, last year allowing universities to raise the maximum fee from £ 3375 to£ 9000 with effect from September 12. To the dismay of the government, most universities have veered towards the maximum, according to the Economist.

How come? One would have thought fee would vary depending on quality. I suppose mediocre institutions get away with the same fee because of the scarcity value of higher education: there is isn't enough competition and entry and exit are not really free. We see in India as well. The moment the IIMs raised their fee, so did other b-schools including those that are not a patch on the top IIMs. They know that even at absurdly high fees, there will be enough takers in the Indian market.

Now, the British government wants to introduce differentiation in the market. It has come up with two ideas. One, higher quality institutions will be allowed to expand as much as they like (higher quality being defined by the number of applicants with a certain number of A grades). This, it is believed, will force mediocre institutions to drop their fees in order to attract clever students. Secondly, 5% of all places will be reserved for institutions that charge £ 7500 or less. This latter, of course, assumes that capacity is sufficiently elastic at the cheaper institutions.

Will these measures work? I doubt it. Leaving aside a handful of top institutions, quality for the rest is rather hard to define. Besides, students will opt for institutions that are closer to their place of residence, other things being broadly equal. In other words, the link between quality and fee will not be as strong as expected and the gap between supply and demand in higher education will remain acute given that more and more people aspire for university education.

Right now, it is the government that makes available loans to students, not banks. Higher university fees only spell higher bad debts for the government0- at the best of times, the government finds it difficult to collect repayments. In other ways, the government's subsidy burden will go up. Whether transferring more of the subsidy burden from the private sector to the government will improve quality is doubtful- quality is not a function of fees alone, it is a function of overall funding and the broad ecosystem as well.


Anonymous said...

Agree with your opinion.

The UK Model underpines an intrinsic assumption that Clever Students are always Rich enough to afford fees of these institutes. And this assumption also finds its place in India, particular when you talk about IIM & ISB.

For eg. IIM fees (particularly fees of PGPX), is exhorbitantly high that cannot be afforded for an aspiring but middle class candidate who is equally eligible as is a candidate from sumptuous family. Loan is an option, but at the end of day it's a deferred cash flow and for middle class student, who already shoulders many family responsibilities - pursuing for PGPX remains a dream (It is my own case that is referred).

I think, there is need to look at this assumption and equity based fee structure.


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sscguides said...

It is a good sign that the industry is taking active interest by partnering the colleges because this exercise, prepare students for the industry's work at the academic level itself, rather than few weeks on job training session later

Deepak Jain said...

Sir, you've taken up a burning topic. I feel that we get emotional while discussing education fees. At a macro level, you should let market find its own level wrt fees. If some students, may less bright than the poorer ones, can pay their way through to good education whats wrong with that.
Our energies will be better spent on discussing ways of adding more seat for courses which are in demand rather than on fees charged by incumbent players.
Are we suggesting that most students are unaware of the real quality of an institute when they apply for it, inspite of formidable fees?

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