FAIR: funding with affordable income-based repayments

The FAIR scheme is a means for students to pay for their education that aligns their interests with those of the institution so creating incentives for better employability outcomes. It grew out of a letter to The Economist which came to the attention of the Russell Group in 2010. At that time they were seeking possible responses to the Browne Review that addressed Universities’ need for additional income. Post the 2008 Global Financial Crisis it appeared unlikely that the government would increase direct funding so an alternative, private sector, arrangement was required.

The concept was worked up into a paper and presented to the Russell Group. A subsequent, more detailed, version, was sent through contacts to the Treasury who considered it alongside the state income-contingent loan scheme that was, in due course, implemented.

The case for FAIR – a private risk-sharing agreement between student and university – has since gone from strength to strength. Risk-sharing agreements have grown in popularity around the world and there are now FCA regulated entities in the UK able to carry out all regulated and administrative functions required to put a FAIR-type scheme in place.

Various papers have been written explaining the FAIR scheme which are available in the resources section. Below are highighted some of the key aspects of the scheme. Having developed and implemented a scheme at the University of Buckingham, CAMROW is able to help any university put in place its own programme.

The problem

  1. The current student funding system in the UK is unsustainable. It had been facing a crisis of affordability – with huge taxpayer losses on student loans. This has been mitigated by the post-Augar freeze in the level of the student loan but that simply passes the affordability buck to the institutions.
  2. Growing international demand has offset the loss on home students for now, but this is a risky strategy for the long term. Both China and India are developing their own higher education sectors and geopolitical developments could quickly reduce the flow of students.
  3. Developments in artificial intelligence tools will change the world of work and teaching methods at an unprecedented speed. Already a large proportion of students do not secure employment that utilises their education and they do not gain financially from the investment. This will be exacerbated if institutions do not quickly adjust to the changing jobs market.
  4. The teaching of explicit (written) knowledge looks set to become ever more redundant as machines prove themselves more capable repositories and communicators of factual knowledge. University students need to improve their tacit (soft skills) knowledge – that which distinguishes us as human – as employers have demanded for years.
  5. Regulation of degree course content and teaching methids are an obstacle to speedy innovation to respond to a changing teaching and work environment. In particular, the necessary switch towards the teaching of tacit knowledge, that which cannot  be expressed in writing, will be inhibited by any regulation as regulation always calls for written statements.

The solution

  1. In the two major review of university funding both Dearing and Browne,  indicated that they wished to propose a system of a direct funding relationship between student and institution. This was not implemented,  instead the present system mimics the block grant as neither student nor university have any power to vary the unit of resource. The block grant mentality and financial logic drives the regular and heavy handed interference by the state. The answer is to do what Dearing and Browne proposed and arrange for universities to offer income contingent loans direct to their students.
  2. This can be implemented without placing undue risk on the sector and while recognising the public benefits of higher education, by keeping the current policy of state loans being frozen at £9,250 but allowing universities to set their own tuition fee levels above this level. That will allow each institution to set fee levels by course and in accordance with its own needs.
  3. To ensure all have access each University would be obliged to offer an income contingent loan in the amount of the difference between the state loan and the tuition fee. A number of universities are already doing this at post graduate level and the University of Buckingham has implemented this at undergraduate level, where its fees exceed the state loan amount.
  4. As the state contribution to the sector will now be on a long term decline course content and teaching regulation should be eliminated so that universities can more quickly innovate to meet the needs of their students and the jobs market. This may involve a shift towards more emphasis on teaching tacit knowledge (soft skills) or more focussed qualifications to stay ahead of machines. What is necessary is to give them the freedom to experiment and share learning, relying on the financial imperatives take the place of rules.
  5. If the freeze on the state loan is maintained while universities build up their portfolio of private loans this policy will save the government many billions in loan subsidies, potentially of the order of £60bn.

FAIR details

When Dearing and Browne reported on the university funding arrangements both agreed that there should be a direct financial relationship between student and university. However, the arrangements put in place by the government substituted that direct relationship with a system whereby the parties were instead clients of or suppliers to the state.

FAIR corrects that error. Students contract directly with their university to pay tuition fees by means of a share in their future earnings.

This direct relationship eradicates the moral hazard of a scheme where government sits in the middle. It aligns the interests of student and university for the long term. As it reduces the cost to the state it frees the sector from the risk of political interference – both in the setting of their fees and hence revenue and potentially from much burdensome regulation.

This is the sustainable scheme that so far has eluded the UK.

Apprenticeship parallel

Deferred amount The value of tuition fees replaced by this agreement £3,000
Income share The proportion of gross annual income that must be paid each month subject to earnings being above the minimum income threshold 5%
Required count This is the number of non-zero monthly repayments that must be paid before the obligation ends 120
Minimum income threshold Payments are only due in any month if gross income for that month, when annualised, exceeds this figure £26,000
Maximum total amount payable The multiple of the deferred amount that is the maximum that must be paid in the event earnings are very high; if the multiple is reached, payment obligations cease even if the required count has not been reached 5
Payment window After this length of time, post-graduation payment obligations cease even if nothing has been paid back 15 years