University tuition fee rise may not save taxpayers any money, says thinktank

Lib Dem Danny Alexander, the chief secretary to the Treasury, has refused to rule out another increase in tuition fees. Photograph: Lee Thomas/Demotix/Corbis

Long-term weaknesses in the UK economy mean that raising university tuition fees in England to £9,000 may not save taxpayers any money and students could still be forced to pay even more, according to the Institute for Fiscal Studies (IFS).

A report by the thinktank suggests many of the claims made by the government in favour of the changes to higher education funding in 2012 may take decades to be tested, and that the returns on student loans are likely to be much lower than previously forecast because graduates are not earning enough to pay back their loans.

Liberal Democrat support for higher fees, breaking a pre-2010 election promise, saw the bottom fall out of the party's polling.

The IFS report, published on Thursday, adds to mounting evidence that the politically catastrophic decision failed to solve the funding problem of the expanded university sector.

Danny Alexander, the Liberal Democrat chief secretary to the Treasury, has pointedly refused to rule out further increases in the tuition fee.

Liam Byrne, the shadow minister for universities, said: "The IFS have called it exactly right – the Tory-led government trebled student fees but its system could end up costing the taxpayer more than the one it replaced."

The IFS study says that the new funding formula has only served to create further uncertainty over how universities and colleges are funded, compared with the previous model where the bulk of funding came directly from central government.

The IFS researchers note that if the government wanted to reduce its loan subsidy under the current system, it could increase the repayment rate, reduce the repayment threshold or extend the repayment period.

It calculates that for each £1 loaned to students to cover tuition and maintenance costs, the average long-term cost to the government is estimated to be 43p.

That means an average loan to each student of more than £40,000 receives a subsidy of just over £17,000 per student.

"Each of these would tend to increase the repayments made by middle-earning graduates. Alternatively, the government could choose to raise the interest rate charged, which would only affect high-earning graduates," the IFS said.

The publication of the IFS report comes as Universities UK – the combined public lobbying group for British universities – announced the formation of a powerful committee to investigate the current system of student funding, with seven vice-chancellors as well as representatives from the IFS and KPMG on the panel.

According to Universities UK, the panel will look "in particular at how the cost of providing tuition fee and maintenance loans can be reduced" – which may require a greater financial contribution from graduates.

Sir Christopher Snowden, the president of Universities UK and Surrey vice-chancellor who will chair the panel, left open the possibility that the terms of student loan repayments could be changed to keep the current funding model sustainable.

Snowden said that to provide long-term stability for higher education in England, the panel will "seek a broad political consensus" on funding and that the panel will be seeking contributions from the National Union of Students and other groups.

"The panel will seek to ensure that the system offers value for money for students and is financially sustainable for government. It must also provide a long-term stable funding environment for universities that allows them to deliver high-quality teaching and the skilled graduates that the economy and society needs," Snowden said.

In February the Department for Business, Innovation and Skills – which oversees higher education funding – received permission from the Treasury for a further £5.5bn budget provision for potential losses in student loan repayments.

The IFS's gloomy view on repayments is based on recent economic forecasts by the independent Office for Budget Responsibility, which cast doubt on earlier, more optimistic estimates regarding graduate employment and repayments.

Rowena Crawford, a senior research economist at IFS and one of the authors of the report, said: "The government's changes to the higher education finance system have not reduced the total taxpayer contribution per student substantially. "The net effect on the public finances is primarily an increase in uncertainty, with the certain cost of teaching grants replaced by the uncertain costs of providing student loans.

"If future graduate repayments come in lower than expected, then a future government will have to accept higher-than-expected levels of public-sector debt, or offset this by increasing taxes or cutting spending either on higher education or elsewhere."

A spokesperson for BIS said: "As a result of our reforms, a greater proportion of students from disadvantaged backgrounds are going to university than ever before.

"We have protected those on lower incomes by increasing the repayment threshold to £21,000. Our universities are now well funded for the long term and receive around 25% more funding per student for teaching.

"These figures for repayments are estimates and based on a prediction of economic circumstances some 35 years in the future. They will continue to fluctuate and do not present an immediate pressure on the system."