Value for students in 2020

How much does it cost to address student value-for-money fears in a pandemic?

[This article was originally published by the Higher Education Policy Institute in June 2020. It considers the risk of teaching disruption for the 2020-21 academic year and proposes a way of mitigating this so that students are not deterred by feeling they are getting poor value.]

A feature of the virus crisis has been high uncertainty about the near future. Some of these uncertainties, particularly unemployment, will probably act to increase university entry. But others, like the effect of new student number controls, are a force to reduce it. The largest customer ‘value’ concerns naturally relate to the two big-ticket items: fees and rent. Potential students are asking will I get the holistic on-campus learning and social ‘package’ I feel I am paying for, and will I be able to enjoy and get utility from the student accommodation that I rent? Universities cannot really give certain answers. This creates a value-for-money risk for the customer. Without some form of counterbalancing compensation, this risk could turn into a barrier for would-be students where the value equation is finely balanced.

 

 

The university – the supplier – has its own powerful internal logic. We need the fee income, not just for teaching but to subsidise research too. None of the unfavourable circumstances are our fault. And we have used extraordinary effort and innovation from committed staff to get alternative arrangements in place. Students will get their loans and grants in any case, and our costs have not gone down, so it is only fair that we get paid in full. The trap for the supplier here lies not in the merits of these arguments, but whether they have any engagement with the customer logic. The risk is they do not, and student recruitment is lower than it could be as a result.

What can universities do?

An obvious response is to cut the tuition fee, improving the ‘money’ side of the value-for-money concern. This has merits but it might not be the best answer. The data is pretty strong that students are not normally drawn to lower fees for full-time undergraduate, which they probably equate with lower quality. Besides, universities do need the cash now, and modest fee discounts would benefit the Government more than the student (most are not expected to pay off the loan in full, so reducing balances would mostly limit what governments write off rather than what students pay back).

 

An alternative is to recognise the legitimate student concern over a curtailed experience and act to restore a sense of fairness by increasing the ‘value’ side of the scales. One option is a £9,000 credit to use to cover the tuition cost of one year of postgraduate study with the university if students successfully complete their degree. In our analysis work with universities on offers, we have often found that similar aspiration-supporting, merit-based rewards are not seen as signals of lower quality in the same way as straightforward discounts or gifts sometimes are. Purporting to understand the minds of potential university entrants is a risky business, but it could seem fair compensation for the experience uncertainty, whilst signalling that resourcing for quality is intact, and gives a compelling reason not to defer. If your main concern is not getting the three year on-campus experience you thought you were paying for, then this restores that option, and gives you something productive to do in 2020-21.

 

For the university, it pushes the crisis cost out, and reduces it (since not everyone influenced by the offer would ultimately take it up). It might well be supportive of degree completion and earnings trajectories, benefitting the university’s statistics. And, if the £11,000 Master’s loan is still around in 2023, it would be a valuable experiment on the equality profile of postgraduate study if both fees and living costs were supported. Some might be worried about a Hoover-style ‘two free flights: unbelievable’ risk of being somewhat over effective, with postgraduate uptake soaring. But that risk is defined in time and cost, and even in the (unlikely) event of 2023 graduate recruitment falling to zero, teaching an entire entry cohort for four years with the income from just three – as is sometimes the case for RUK students (non-Scotland residing UK residents) in Scotland – perhaps is not the worst fate potentially in store for the sector at this point.

 

The accommodation issue needs a different response, one of neutralising purchase risk. Universities simply need to be clear that if restrictions render accommodation of no use then the students will not pay rent for the affected weeks. Where universities are in partnership with purpose-built student accommodation (PBSA) suppliers then they need them to adopt this policy too, sharing the cost as appropriate. Refunding rent is not normally a tempting proposition for PBSA suppliers. But they will know that if fears of being trapped into paying rent for empty rooms starts to cause 2020 UK recruitment volumes to unravel then they face years of unfilled beds in their expensive assets. If the rent guarantee is not called upon, then the cost will be exactly zero. But if it is needed, then suppliers are the better home for this risk than individual customers.

 

Higher education policy is rich with seemingly attractive ideas that do not survive an encounter with the data. We have run some recruitment models for the 2020 entry cohort to put some broad feasibility parameters around these proposals. It is a simplified model of the sector (here taken to be universities and accommodation providers collectively), looking at UK domiciled full-time students, with data-led parameters for teaching income, undergraduate student accommodation (which we have treated at a sector level, regardless of who is providing it), completion rates and progression to postgraduate (which we assume increases in response to the postgraduate credit, by about 20 per cent). We have looked exclusively at revenue (from either fees or teaching grants, taking an approximate UK average of £9,000), effectively assuming that the costs of teaching provision are more fixed in nature than variable over the changes we are looking at.

 

We have created some scenarios in this model sector. The first is the one we cannot have, the 2020 entry cohort progressing as normal (we have simply copied 2019 for this). The second is a ‘do nothing’ scenario. Here universities do not do anything to address the student value perception, and the entry cohort falls by 20 per cent as a consequence. This is not an exceptional figure for changes in demand where there is a large value shock. Scotland to England demand in 2012 and Nursing demand in 2017 are both examples with an abrupt change to value which generated demand reductions at this level. This is not a forecast for 2020, but an unusually wide range of outcomes are possible this cycle and this is one of them.

 

We then have the main ‘respond’ scenario where universities give both the postgraduate credit and the accommodation guarantee (assumed triggered for 16 weeks). This is deemed sufficient to restore the value equation and reduce risk, so the entry cohort stays the same.

 

We also consider where this university response is amplified by a Government response of student number controls being lifted. Here we assume UK recruitment to be up 17 per cent. This is large, but with higher education alternatives like employment, and ‘gap year’ type travel plans, not looking particularly appealing, it is not unfeasible. There were large proportional increases in mature demand following the financial crisis, and by 18-year olds into the 2011/12 entry year and the total number of UK applicants increased by about this amount across the 2009 and 2010 cycles (combined). Such a 17 per cent increase is roughly equivalent to all of the young UK unplaced applicants in a typical year (around 80,000 aged 24 or under) being admitted. By coincidence this happens to be close to the 80,000 or so (UCAS recorded) undergraduate full-time places that EU and international students would have been expected to take up in 2020 but now may not. If these numbers are down, then it is certain the sector would have the teaching and accommodation capacity if number controls were suspended across the UK.

 

The results from these scenarios are summarised in Table 1 (with precision set to assist further calculations rather than convey certainty). They model UK entry covering 370,000 (-20 per cent) to 540,000 (+ 17 percent): a very wide range, but feasible probable extremes in the current conditions. There is some £5 billion variation in income across this range, underlining that securing the UK entry cohort should probably be the foremost concern for the sector.

Table 1: Sector income from the 2020 undergraduate entry cohort under different scenarios
  Scenario
1.Normal 2.Do Nothing 3.Respond 4.Respond+Grow
2020 UG entrants 464,335 371,468 464,335 543,272
(difference from 'Normal') 0 -92,867 0 78,937
         
UG student-years 1,280,584 1,024,468 1,280,584 1,498,284
(difference from 'Normal') 0 -256,117 0 217,699
         
UG teach income £M 11,525 9,220 11,525 13,485
(difference from 'Normal') 0 -2,305 0 1,959
UG accom income £M 6,147 4,917 6,147 7,192
UG accom refund £M 0 0 -829 -970
         
Graduates 390,454 312,363 390,454 456,831
PG entrants (2023) 66,377 53,102 78,325 91,640
PG teach income £M 597 478 0 0
PG credit 'cost' £M 0 0 -705 -825
         
Cohort teach income £M 12,123 9,698 11,525 13,485
(difference from 'Normal') 0 -2,425 -597 1,362
Cohort accom income £M 6,147 4,917 5,317 6,221
(difference from 'Normal') 0 -1,229 -829 75
         
Cohort all income £M 18,269 14,616 16,843 19,706
(difference from 'Normal') 0 -3,654 -1,427 1,437

With ‘do nothing’ the sector does not pay any accommodation compensation and collects postgraduate fees from the cohort in 2023. But it loses 250,000 ‘student-years’ from 2020 entry cohort. Overall, the sector loses £3.6 billion in revenue against a normal year, from the lower teaching income (£2.4 billion) and reduced (£1.2 billion) undergraduate accommodation revenue.

 

Under the ‘respond’ scenario the sector pays out £0.8 billion accommodation refunds in 2020/21. It then has a ‘cost’ of £0.7 billion in credits for 78,000 postgraduate students in 2023/24 (the income ‘lost’ relative to ‘Normal’ is less than this – around £0.6 billion – since there would be fewer students – 66,000 – without the appeal of the credits). But the response has preserved income from its undergraduate teaching, and undergraduate accommodation remains utilised. So, although the ‘respond’ costs mean total income is down around £1.5 billion against ‘Normal’, the sector has around £2 billion more revenue compared to ‘do nothing’. It has reduced its potential losses by over half.

 

The Government choosing to let higher education grow, and the postgraduate credit and accommodation guarantee (combining with a lack of university alternatives) being attractive enough to boost UK intake by around 80,000, gives the ‘respond + grow’ scenario. Here compensation payments increase to £1.0 billion for accommodation, with a cost of £0.8 bn in postgraduate credits for 92,000 students (revenue ‘lost’ relative to ‘normal’ remains fixed at £0.6 billion). But the growth in undergraduate teaching (£2.0 billion) and the greater utilisation of accommodation offsetting the discounts means that, overall, the sector gets around £1.4 billion more revenue compared to ‘normal’. This is not a free lunch; it implies teaching would need to become about 5 per cent more efficient per-student-year (since the undergraduate revenue is temporarily spread over undergraduate and some PG teaching). It is equivalent to annual teaching income being cut from £9,000 to £8,500 for this cohort. Nevertheless, economies of scale might assist, and the prospect of £1.4 billion more income than ‘normal’ just gives more options than the £3.5 billion reduction under ‘do nothing’.

 

Universities have a range of unpalatable options for 2020 and relying on generous help from Government to escape them currently looks unwise. Universities have made commendable efforts in a crisis not of their making, but this counts for little if the students’ customer logic is not addressed. This is that the value they see in going to university has been diminished, the risks of purchasing have increased, and not much has been offered to offset those negatives. To avoid customers turning away, universities need to restore a sense of fairness in the eyes of the students. Doing so will cost the sector billions, but not doing so could cost billions more.

[This article was originally published by the Higher Education Policy Institute in June 2020. It considers the risk of teaching disruption for the 2020-21 academic year and proposes a way of mitigating this so that students are not deterred by feeling they are getting poor value.]

A feature of the virus crisis has been high uncertainty about the near future. Some of these uncertainties, particularly unemployment, will probably act to increase university entry. But others, like the effect of new student number controls, are a force to reduce it. The largest customer ‘value’ concerns naturally relate to the two big-ticket items: fees and rent. Potential students are asking will I get the holistic on-campus learning and social ‘package’ I feel I am paying for, and will I be able to enjoy and get utility from the student accommodation that I rent? Universities cannot really give certain answers. This creates a value-for-money risk for the customer. Without some form of counterbalancing compensation, this risk could turn into a barrier for would-be students where the value equation is finely balanced.

 

 

The university – the supplier – has its own powerful internal logic. We need the fee income, not just for teaching but to subsidise research too. None of the unfavourable circumstances are our fault. And we have used extraordinary effort and innovation from committed staff to get alternative arrangements in place. Students will get their loans and grants in any case, and our costs have not gone down, so it is only fair that we get paid in full. The trap for the supplier here lies not in the merits of these arguments, but whether they have any engagement with the customer logic. The risk is they do not, and student recruitment is lower than it could be as a result.

What can universities do?

An obvious response is to cut the tuition fee, improving the ‘money’ side of the value-for-money concern. This has merits but it might not be the best answer. The data is pretty strong that students are not normally drawn to lower fees for full-time undergraduate, which they probably equate with lower quality. Besides, universities do need the cash now, and modest fee discounts would benefit the Government more than the student (most are not expected to pay off the loan in full, so reducing balances would mostly limit what governments write off rather than what students pay back).

 

An alternative is to recognise the legitimate student concern over a curtailed experience and act to restore a sense of fairness by increasing the ‘value’ side of the scales. One option is a £9,000 credit to use to cover the tuition cost of one year of postgraduate study with the university if students successfully complete their degree. In our analysis work with universities on offers, we have often found that similar aspiration-supporting, merit-based rewards are not seen as signals of lower quality in the same way as straightforward discounts or gifts sometimes are. Purporting to understand the minds of potential university entrants is a risky business, but it could seem fair compensation for the experience uncertainty, whilst signalling that resourcing for quality is intact, and gives a compelling reason not to defer. If your main concern is not getting the three year on-campus experience you thought you were paying for, then this restores that option, and gives you something productive to do in 2020-21.

 

For the university, it pushes the crisis cost out, and reduces it (since not everyone influenced by the offer would ultimately take it up). It might well be supportive of degree completion and earnings trajectories, benefitting the university’s statistics. And, if the £11,000 Master’s loan is still around in 2023, it would be a valuable experiment on the equality profile of postgraduate study if both fees and living costs were supported. Some might be worried about a Hoover-style ‘two free flights: unbelievable’ risk of being somewhat over effective, with postgraduate uptake soaring. But that risk is defined in time and cost, and even in the (unlikely) event of 2023 graduate recruitment falling to zero, teaching an entire entry cohort for four years with the income from just three – as is sometimes the case for RUK students (non-Scotland residing UK residents) in Scotland – perhaps is not the worst fate potentially in store for the sector at this point.

 

The accommodation issue needs a different response, one of neutralising purchase risk. Universities simply need to be clear that if restrictions render accommodation of no use then the students will not pay rent for the affected weeks. Where universities are in partnership with purpose-built student accommodation (PBSA) suppliers then they need them to adopt this policy too, sharing the cost as appropriate. Refunding rent is not normally a tempting proposition for PBSA suppliers. But they will know that if fears of being trapped into paying rent for empty rooms starts to cause 2020 UK recruitment volumes to unravel then they face years of unfilled beds in their expensive assets. If the rent guarantee is not called upon, then the cost will be exactly zero. But if it is needed, then suppliers are the better home for this risk than individual customers.

 

Higher education policy is rich with seemingly attractive ideas that do not survive an encounter with the data. We have run some recruitment models for the 2020 entry cohort to put some broad feasibility parameters around these proposals. It is a simplified model of the sector (here taken to be universities and accommodation providers collectively), looking at UK domiciled full-time students, with data-led parameters for teaching income, undergraduate student accommodation (which we have treated at a sector level, regardless of who is providing it), completion rates and progression to postgraduate (which we assume increases in response to the postgraduate credit, by about 20 per cent). We have looked exclusively at revenue (from either fees or teaching grants, taking an approximate UK average of £9,000), effectively assuming that the costs of teaching provision are more fixed in nature than variable over the changes we are looking at.

 

We have created some scenarios in this model sector. The first is the one we cannot have, the 2020 entry cohort progressing as normal (we have simply copied 2019 for this). The second is a ‘do nothing’ scenario. Here universities do not do anything to address the student value perception, and the entry cohort falls by 20 per cent as a consequence. This is not an exceptional figure for changes in demand where there is a large value shock. Scotland to England demand in 2012 and Nursing demand in 2017 are both examples with an abrupt change to value which generated demand reductions at this level. This is not a forecast for 2020, but an unusually wide range of outcomes are possible this cycle and this is one of them.

 

We then have the main ‘respond’ scenario where universities give both the postgraduate credit and the accommodation guarantee (assumed triggered for 16 weeks). This is deemed sufficient to restore the value equation and reduce risk, so the entry cohort stays the same.

 

We also consider where this university response is amplified by a Government response of student number controls being lifted. Here we assume UK recruitment to be up 17 per cent. This is large, but with higher education alternatives like employment, and ‘gap year’ type travel plans, not looking particularly appealing, it is not unfeasible. There were large proportional increases in mature demand following the financial crisis, and by 18-year olds into the 2011/12 entry year and the total number of UK applicants increased by about this amount across the 2009 and 2010 cycles (combined). Such a 17 per cent increase is roughly equivalent to all of the young UK unplaced applicants in a typical year (around 80,000 aged 24 or under) being admitted. By coincidence this happens to be close to the 80,000 or so (UCAS recorded) undergraduate full-time places that EU and international students would have been expected to take up in 2020 but now may not. If these numbers are down, then it is certain the sector would have the teaching and accommodation capacity if number controls were suspended across the UK.

 

The results from these scenarios are summarised in Table 1 (with precision set to assist further calculations rather than convey certainty). They model UK entry covering 370,000 (-20 per cent) to 540,000 (+ 17 percent): a very wide range, but feasible probable extremes in the current conditions. There is some £5 billion variation in income across this range, underlining that securing the UK entry cohort should probably be the foremost concern for the sector.

Table 1: Sector income from the 2020 undergraduate entry cohort under different scenarios
  Scenario
1.Normal 2.Do Nothing 3.Respond 4.Respond+Grow
2020 UG entrants 464,335 371,468 464,335 543,272
(difference from 'Normal') 0 -92,867 0 78,937
         
UG student-years 1,280,584 1,024,468 1,280,584 1,498,284
(difference from 'Normal') 0 -256,117 0 217,699
         
UG teach income £M 11,525 9,220 11,525 13,485
(difference from 'Normal') 0 -2,305 0 1,959
UG accom income £M 6,147 4,917 6,147 7,192
UG accom refund £M 0 0 -829 -970
         
Graduates 390,454 312,363 390,454 456,831
PG entrants (2023) 66,377 53,102 78,325 91,640
PG teach income £M 597 478 0 0
PG credit 'cost' £M 0 0 -705 -825
         
Cohort teach income £M 12,123 9,698 11,525 13,485
(difference from 'Normal') 0 -2,425 -597 1,362
Cohort accom income £M 6,147 4,917 5,317 6,221
(difference from 'Normal') 0 -1,229 -829 75
         
Cohort all income £M 18,269 14,616 16,843 19,706
(difference from 'Normal') 0 -3,654 -1,427 1,437

With ‘do nothing’ the sector does not pay any accommodation compensation and collects postgraduate fees from the cohort in 2023. But it loses 250,000 ‘student-years’ from 2020 entry cohort. Overall, the sector loses £3.6 billion in revenue against a normal year, from the lower teaching income (£2.4 billion) and reduced (£1.2 billion) undergraduate accommodation revenue.

 

Under the ‘respond’ scenario the sector pays out £0.8 billion accommodation refunds in 2020/21. It then has a ‘cost’ of £0.7 billion in credits for 78,000 postgraduate students in 2023/24 (the income ‘lost’ relative to ‘Normal’ is less than this – around £0.6 billion – since there would be fewer students – 66,000 – without the appeal of the credits). But the response has preserved income from its undergraduate teaching, and undergraduate accommodation remains utilised. So, although the ‘respond’ costs mean total income is down around £1.5 billion against ‘Normal’, the sector has around £2 billion more revenue compared to ‘do nothing’. It has reduced its potential losses by over half.

 

The Government choosing to let higher education grow, and the postgraduate credit and accommodation guarantee (combining with a lack of university alternatives) being attractive enough to boost UK intake by around 80,000, gives the ‘respond + grow’ scenario. Here compensation payments increase to £1.0 billion for accommodation, with a cost of £0.8 bn in postgraduate credits for 92,000 students (revenue ‘lost’ relative to ‘normal’ remains fixed at £0.6 billion). But the growth in undergraduate teaching (£2.0 billion) and the greater utilisation of accommodation offsetting the discounts means that, overall, the sector gets around £1.4 billion more revenue compared to ‘normal’. This is not a free lunch; it implies teaching would need to become about 5 per cent more efficient per-student-year (since the undergraduate revenue is temporarily spread over undergraduate and some PG teaching). It is equivalent to annual teaching income being cut from £9,000 to £8,500 for this cohort. Nevertheless, economies of scale might assist, and the prospect of £1.4 billion more income than ‘normal’ just gives more options than the £3.5 billion reduction under ‘do nothing’.

 

Universities have a range of unpalatable options for 2020 and relying on generous help from Government to escape them currently looks unwise. Universities have made commendable efforts in a crisis not of their making, but this counts for little if the students’ customer logic is not addressed. This is that the value they see in going to university has been diminished, the risks of purchasing have increased, and not much has been offered to offset those negatives. To avoid customers turning away, universities need to restore a sense of fairness in the eyes of the students. Doing so will cost the sector billions, but not doing so could cost billions more.