On the costs of HE

As I mentioned in my last post, the Government has just created first for-profit university college in the UK. But is this a runner as a business model?

It might seem an odd question to even ask: surely BPP wouldn’t be doing it if they couldn’t make money? But my experience in the dot-com bubble suggests it’s worth a quick look. Back then, it seemed to me that there were an awful lot of businesses being set up that couldn’t possibly make money. At the time I thought that they obviously knew better than me, since they were serious business people with real, serious quantities of money at stake. Shortly after, of course, it became clear that they didn’t know any better, and it was then obvious to everyone that an awful lot of companies had been set up that couldn’t possibly make money.

This all comes with a big health warning: I’m not an economist, this is not my main area of expertise, it’s done in terrible haste in broad-brush oversimplifying terms.

(And, I should add, even when I can get such sums correct, my business acumen is not perfect. Last week  someone (jokingly) suggested I set up as a Bicycling Barista, bringing rapid-delivery top-quality espresso to the local community using sustainable transport: phone me up, get me round to your door in minutes with my portable espresso maker to make you a perfect cup. I did some quick sums and proved to myself that it couldn’t possibly make money. Other food delivery services need an order of least £10-£20 to make it worth turning up at your door. People will pay about £1.50 for a cup of espresso. Even if they’ll pay double for at-the-door service, and I also sold cakes at high markups, it’s not a goer as a business. Two days after thus satisfying myself that it couldn’t work, I met a guy who has a Transit van with a full espresso machine in the back, who’s making a living that way. His model is different: he goes to busy places – including events – parks up, opens the back door, sticks up a sign, and sells the full range of espresso-based coffees to lots of people in one go.)

Ok. Caveats aside, how much does a degree cost at retail?

Well, current UK tuition fees are capped at £3,290 per year, which is just short of £10,000 for a three-year degree. That’s a lower bound for the cost.

But – as is widely reported – that is a huge underestimate. This gap is met mostly from the funding bodies (HEFCE, HEFCW, SHEFC and DELNI) grants, but many universities are operating at an annual deficit, some serious, and there is considerable pressure to raise the tuition fees cap, perhaps substantially. HESA finance statistics for the whole sector give a breakdown of income as 34.8% grants, 28.7% fees, 16.3% research, 19% other, and 1.4% endowments and investments. (I’ve no idea what the ‘other’ income is and whether it contributes to the cost of students – it pretty significant.) This suggests that grants are worth about 20% more than fees, which is about another £4,000 per year, giving a grand total of £7,300 per year or £22,000 for a three-year degree.

Fees for foreign students are not capped, and they pay significantly higher fees – to take one example, the University of York charges Overseas students £11,300 or £14,850 a year. That works out at about £34,000 to £45,000 for a three-year degree. This is probably an upper bound: famously, foreign students provide a significant subsidy to UK students.

What about different models, like the OU?

Our students study part time, at a distance, with a hybrid/blended tuition model – some modules have face to face tutorials and print materials, some are entirely online, and we’re moving in the online direction. Our costs are quite different to traditional universities: we don’t have to maintain the campuses and student facilities that other universities do, and we work on an at-scale basis for most of our courses: they cost a lot to produce, but we defray that cost over many students – up to tens of thousands on one course. Most students study part time while employed, or with significant care responsibilities (children, others), and take at least six years to complete a degree.

So what does the OU cost?

The OU’s What can you expect to pay? page reckons the fees are about £4,560 for a UK student for a BSc(Hons) in Psychology, based on 2008 prices – rounded up to £4,600 that’s still considerably cheaper to the customer than £10,000 for a traditional university.  But, of course, that’s only the tuition fees.

The OU’s financial statement for the year to 31 July 2009 gives headline income figures of £233.7m from funding bodies and £141.6m from tuition fees , giving a total of £375m. (Lumping tuition fees paid by employers – including many public sector employers like the NHS and Social Services Depts – and entirely ignoring research, investment/endowment and other income, a total of about £45m.) . We taught 251,639 students that year, or 78,110 full-time equivalents (FTEs). That gives £4,800 in total per FTE year, made up of £1800 in tuition fees and £3,000 from funding bodies. We made a modest surplus of £9.6m, the equivalent of £100 per FTE per year.  Multiplying by 3 to give an entire degree cost gives us £14,400 in total, made up of £5,400 in fees and £9,000 from the state.

(Note that this is an average over all of the OU’s provision, which includes significant postgraduate provision, and a small number of non-UK students who pay premium rates.)

So, to sum up, the current cost of a whole three-year undergraduate degree is probably somewhere between £22,000 and £45,000 at a conventional university, or around £14,400 at the OU. Students pay £10,000 of that themselves at a conventional university, or £4,600 to £5,400 at the OU.

What’s the private sector doing?

Well, the University of Buckingham charges £17,880 in fees for a 9-term two-year undergraduate degree starting in September 2010, or £29,520 for international students. That’s below the cost of conventional universities, but above the OU, which makes sense: one would expect that they might work out cheaper to provide than the conventional sector, particularly with the two-year model. It’s still in business after nearly 40 years, so it isn’t hopelessly unsustainable, although according to HESA it did have a 2.5% deficit in 2008/9 (income £12.0m, expenditure £12.3m, deficit £300k).

What about BPP?

It’s currently charging £9,675 to UK students for a BSc Business Management or BSc Professional Accounting. It charges £19,500 for international students.

That’s considerably less than Buckingham, substantially lower than conventional universities  – like about half the cost, and lower even than the OU. They have cherry-picked, of course, which is presumably how they manage it. And they have no research to subsidise. Interestingly, they offer fully flexible tuition modes: students can study face to face or online, synchronous or asynchronous – with the students choosing.  My guess is that with careful choice of subjects, and building from scratch for price, this is doable. Especially if they can keep the proportion of international students high.

Back of an envelope conclusion: it’s a potential goer. It’s a great time to start such a business: public sector under huge pressure, HE is traditionally a safe haven in economically straitened times, and there’s as friendly a Government as one could hope for. And a recession is famously a good time to start a business.

Only question is whether people will turn up and pay. I suspect they will, in considerable numbers – something like 170,000 people will want a university place this Autumn and won’t get one, and that shortfall will increase over time. Obviously not all of them will be willing or able to pay these levels of fees, but many will, and a lot of money will be made.

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Author: dougclow

Academic in the Institute of Educational Technology, the Open University, UK. Interested in technology-enhanced learning and learning analytics.

8 thoughts on “On the costs of HE”

  1. I think the interesting challenge is perhaps not the costs but the service students expect once they start having to pay.

    The universities are going to have to get their acts together.

  2. Good “fag packet” work Doug!

    From my forays in this area I concluded:

    a) the OU is not cheap for the Government -they pay the same taeching grant per FTE – in fact there is a bonus to reflect extra costs of PT

    b) It is cheap for OU students – as you say fees are about half.

    But the OU has ferocious drop-out rates and a very low graduation rate. How will that impact on would-be private investors? (BTW The OU has to recruit over 80k fresh bodies each year to maintin its total of 200k reg per year)


    1. Fag packet? Not in these smoke-free days. 🙂 This is all done on high grade office post-consumer waste (aka wasted printouts) thank you very much.

      Useful points – and from the extra sums below thanks to Kevin, my estimates for the cost to the Government are close enough to identical to be within the margin of error. (Which I’m in no position to quantify.)

      The other big factors in the debate is subsistence costs and the net cost to the taxpayer. This FTE-based analysis completely obscures that. But – as you know well! – most OU students are in work, and many of those who aren’t are ‘economically inactive’ for reasons they can’t easily change (e.g. young kids or other caring responsibilities). So there’s a significant opportunity cost to the taxpayer of paying for full-time HE. Don’t suppose you have any guesses at the amount we’re talking about here do you? Stuffed down the back of the sofa or something?

    1. Ah, very good comparator, and shouldn’t have omitted it. Thanks James!

      From that article, the sums work out like this for the LLB on the External Programme:
      * Fees to London University: £2330 to £3765
      *Tuition to Kensington College of Business: £3,000/y = £9,000 for three years
      Total cost: £11,330 to £12,765.

      Looks cheaper than the OU’s £14,000 (correction below) but more expensive than BPP’s £9,675.

  3. Nitpick: grant money isn’t just for teaching. HEFCE for 2010-11 will give out £7426m, of which 63% is for teaching, 22% is for research, and the rest for various odds and ends (earmarked capital, some of which covers research, Universities Modernisation Fund, most of which is arguably teaching, and so on). The point is that most universities get a much lower ratio or teaching to total money than the OU does, because we do so much teaching (in terms of FTEs) and (despite recent big improvements) comparatively little, RAE-driven research. So if you compare teaching income on the basis of /total/ grant, the OU looks cheap, but this is partly an artefact. (OU ratio of HEFCE teaching to research grant is 17.9 to 1. Ratio of total HEFCE funding to all organisations, teaching to research, is 2.9 to 1. So it’s far from negligible.) Source: http://www.hefce.ac.uk/finance/recurrent/2010/ and links from there.

    1. Very good point, thanks Kevin.

      It is hard to get very robust data here without spending a lot of time understanding it (which I suppose isn’t surprising).

      The capital funding isn’t insignificant – from here it was £903m in 08/09, or about 12% of the total grant doled out by HEFCE, but I couldn’t instantly put my hand on what that covered.

      As a simplifying assumption, especially when looking at teaching costs, I think it’s fair to use the teaching/research ratios for the recurrent funding – it’s not a bad guess, and at very worst it can’t possibly be more than 12 percentage points wrong.

      Working with a T:R ratio of 2.9:1 reduces the fees income to conventional universities for teaching from roughly £4,000 a year to £3,000, which reduces the overall funders cost for a three-year degree to £9,000, which with the student fee of £10k gives a total cost of £19,000, down from £22,000.

      The difference for the OU is nearly small enough to ignore for these broad-brush sums, I think. I was about to write ‘of the order of 5%’ but realised that’s a bit silly next to ‘17.9 to 1’. I’m fairly sure there are other buried assumptions in here that would dwarf that, but in dreadful non-mathematician style I’m going to wave my hand at them and mutter a feeble appeal to the Central Limit Theorem in the absence of any way of quickly eliminating any systematic error. Anyway! Carried through it makes it £8,500 in grants for a three-year degree equivalent, rather than £9,000, which with the student fees of £5,400 gives a total cost of £14,000 or so, down from £14,400.

      (I notice my rounding is horribly inconsistent – I have rounded at multiple points in the calculation, which can lead one badly astray. Sorry!)

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