Andrew Oswald: Why the Government must accept higher fees

A novel form of government coalition calls for novel forms of thinking. Times are hard. Fuelled by over-optimistic beliefs about the value of their homes, we have, as citizens of the United Kingdom, borrowed and spent too much. The UK has to pay its long-postponed dues: the country must find ways to spend less on public services, or raise taxes, or some mixture of these two.

In the area of higher education, as the forthcoming Browne report may say, the new Conservative-Liberal alliance would be advised to take the following two actions. One is to allow our universities to set a higher level of university fees. Another is to take a slice of the extra revenue that will then flow in, and use that slice to fund a new and generous grants scheme – not loans scheme – for young men and women from hard-up homes. It would also make sense to listen to the Russell Group universities when they recommend that graduates be able to pay back the current loans earlier and at a higher interest rate.

Such policies would be fair, efficient and liberal. They would require well-off people to pay for the education from which they benefit while allowing youngsters from poorer homes to go to university for almost nothing. Our nation's universities would be encouraged to concentrate on getting right their own particular quality and price; the result would be healthy diversity. Citizens and universities would be left alone to choose and compete without, as at the moment, the hand of the state doing things such as fining popular universities which take on more students than dictated by a bureaucrat's rule.

We should also stop subsidising the interest rate on loans to students. Yesterday I listened to yet another case, not at my own university, of a middle-class student who has opened an ISA account into which she is putting her student loan – thereby pocketing the difference between the market rate of interest and the subsidised rate. My hunch is that tens of thousands of students do this every year. You do not have to have an MBA to realise that that is a sign of a muddled world.

Parents may not realise that universities in this country need to raise far more money. The recent debate on the funding of UK universities has been hampered by emotion and lack of data.

The facts, from the impartial statisticians of the United States Department of Education, are these.

First, across the advanced world, higher education spending per capita is greatest in Switzerland at $24,000 per student. Then, in turn, come the USA ($21,000), Sweden ($16,000), and Denmark ($15,000). The UK is tenth in this league table at $12,000 per student, of which students themselves contribute less than half.

Second, whether we view this UK figure as high or low depends on what we expect to achieve. If we wish our top institutions to compete with the elite American universities, the task is currently hopeless. US Ivy League universities charge students approximately eight times what we do ($40,000 a year in 2010). Plus the rich American universities top this up with endowment income. Hence it is inevitable that the UK, where fees are little more than £3,000, will offer students worse student-staff ratios and an undergraduate education of lower quality than the best US universities.

Third, these funding differences explain why in the most reliable world ranking of universities – the so-called Shanghai ranking, produced with objective data (www.arwu.org) – shows that out of the top 20 universities only two are British, one is Japanese, and 17 are American. It is also why the UK now produces a minute proportion of the world's Nobel Prizes.

Fourth, unless we could command the public support that Swiss universities achieve – which, in my view, is unlikely – the consequence is either to accept that we will perform at a fundamentally second-rate level or allow UK universities to charge higher fees. Surely we do not want to be second-rate?

Fifth, UK parents would be advised to understand that in the future the particularly hard-up UK universities will rationally favour overseas students rather than their own loss-making offspring. If we stick with the current system, UK parents and students will be the losers.

Our nation will have to live increasingly by its brainpower. Higher tuition fees are needed.

The writer is pro-dean for research, Warwick Business School