The university sector is just as broken as banking

Vice chancellors get everhigher salaries and student loans are out of control – yet no one is planning reforms

An abiding truth about finance, reconfirmed by the crisis of 10 years ago, is that, come rain or shine, bankers seem infuriatingly immune to the consequences of their actions. In the good times, they pocket the profits; in the bad times, for fear of the wider economic damage inflicted by banking insolvency, taxpayers are required to bail them out. Heads they win, tails you lose. Gains are privatised, losses socialised.

The comparison should not, perhaps, be taken too far, but the student loan system has spawned a similar phenomenon among our universities. Almost uniquely for what is in effect government spending, the university sector has been spared the “austerity” imposed on just about everything else. Since the cap on tuition fees was raised to £9,000, funding has increased substantially, even as virtually all other forms of spending are squeezed to penury.

One manifestation of this oasis of plenty amid the desolation is the pay of vice chancellors. Despite outrage over the apparently egregious pay of some university heads, there is little obvious sign of contrition. Figures announced by the Office for Students this week showed five English university heads paid themselves more than £500,000 last year. At the same time, concerns have been growing over apparently poor levels of governance. This week saw the resignation of Dominic Shellard as vice chancellor of Leicester’s De Montfort University after an official investigation was launched into “a number of regulatory matters”. Professor Shellard’s resignation is the third such departure from an English university in recent months. Richard Davies was suspended as vice chancellor of Swansea University in November over an alleged conflict of interest.

Again, the comparisons with the banking crisis should not be stretched too far, but collapse in accepted standards of conduct is invariably a sign of excess and trouble to come. As the good times roll, those in charge become complacent and oblivious to risk, until eventually caution is thrown to the wind and they go for broke.

In a number of cases, even the riches of the student loans system have not been enough; some universities find themselves plunged into crisis having embarked on debt-funded expansion plans well in excess of actual demand. Commendably, Sir Michael Barber, head of the Office for Students, has insisted that, unlike the banks – effectively underwritten by “too-bigto-fail” considerations – he will not be stepping in with bailouts.

These issues have nonetheless raised anew wider concerns around the hell-for-leather expansion of our universities. Let’s not be uncharitable. That nearly 50 per cent of the cohort should go through some form of higher education is, in many respects, a wonderful thing, and certainly a noble aspiration. There is plenty of evidence that having a high proportion of the workforce undertake tertiary education can lead to better productivity and increased earnings. Universities have also proved a godsend to many otherwise failing cities, and via overseas students have become an important source of both overseas earnings and foreign goodwill.

Nonetheless, the earnings premium attached to a degree has been falling for some time. The idea that a university education will automatically lead to a higher-paid job is not born out by the grim reality of growing numbers of graduates struggling to repay their loans. The Department for Education has been forced repeatedly to revise up its estimate of those who will never fully repay, but it is obvious that even its latest forecast of 60 to 65 per cent is way too low. The Institute for Fiscal Studies estimates 83 per cent.

This should not come as any surprise. It is not just the number of “worthless”, non-vocational degrees on offer, including the scarcely believable folk and traditional music BA offered by Newcastle University. It is also the notion that greatly increased supply will, of itself, create its own demand in more highly paid jobs. In reality, the income distribution is likely to remain the same, regardless of how well qualified the workforce might be.

The student loan system is creating a monster that governments will battle to control and the economy to satisfy. We are becoming a nation of educated paupers; that’s a dangerous place to be. The value of outstanding student loans was £102billion in March last year. This is expected to reach £473billion within 30 years, equal to nearly a quarter of today’s GDP. The accounting treatment of that debt is in the process of being changed, making the real cost to the taxpayer of the university boom more explicit.

A Government review of university funding is also considering a reduction in the amounts that can be charged in tuition fees. This would lower the financial incentives to recruit more students, and perhaps increase the incentives to win those extra students by improving the quality of courses.

But any radical change to the core architecture of university funding has already been ruled out. As with banking, it seems we are to be largely stuck with a broken system.