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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