BoothPhilip Booth is Editorial and Programme Director at the Institute of Economic Affairs and Professor of Insurance and Risk Management at Cass Business School.

After reforming student finance, the UK Government
now wishes to liberalise the higher education sector. The rationale is simple.
If the Government is paying less of the cost of higher education and students
are paying more, then the sector should be more responsive to students.
Students will be paying the bills so they should be taking the decisions as to
where they go to university and how they study. Why restrict their options to
the currently established universities and why exclude profit-making

The Government is also trying to put different
types of higher education on a similar footing so that there is now a less
clear division between part-time and full-time courses from the point of view
of student support. Given this, it would seem illogical to keep out of the
university sector the private sector, profit-making institutions that have
traditionally served so well those who are taking part-time courses whilst
working in a profession.

Unfortunately, the reform agenda has become
confused and the legislation delayed as the Coalition to sort out ideological
differences and practical details, but the direction of travel should be clear.

Predictably, the traditional, left-leaning higher
education establishment has started squealing about the idea of profit-making
organisations providing higher education. They point to the incentives that
profit-making universities will have to dumb down courses and pack students in
whilst giving them an inferior education. With a disturbing number of current
business courses receiving student satisfaction rates of less than 60 per cent,
perhaps the underlying motive is that they are concerned about the potential
success of the competition rather than the potential failings of the
competition. Perhaps self-interest is at work in their protests.

But the critics of reform do point to credible
evidence. They suggest that for-profit colleges in the US have high student
loan default rates and low completion rates. Indeed, Democrat administrations
have responded to these criticisms by imposing onerous regulation that has put
profit-making higher-education institutions at a disadvantage compared with
other colleges and universities.

There is much the UK can learn from this US
experience and it is important that we do not learn the wrong lessons, as recent
published by the Institute of Economic Affairs shows very

Firstly, for-profit higher education institutions
have improved access in the US dramatically. Between 1986 and 2008, enrolment
in for-profit higher education soared from 300,000 to 1.8 million students. The
for-profits tend to focus on the more vocational courses but, very
significantly, also specialise in taking students who traditionally would have
been excluded from higher-education. More than half of students at US
for-profit institutions in 2007 were over 25 years old and ethnic minority
enrolments comprised 40 per cent of the total. For-profits also take a
particularly high number of first generation students whose parents do not hold
a degree.

These for-profits institutions have achieved this
without the natural advantages of non-profit education institutions, such as
inherited real estate and a favourable tax status. For-profits can afford fewer
staff but employ those staff more efficiently at the coal face of teaching.
Online education and curriculum standardisation across institutions also leads
to greater efficiency compared with government-cushioned, non-profit

It is against this background that the objections
of the chattering classes to the profit motive in higher education should be
judged. As the Wall Street Journal noted two years ago, the war against
for-profit colleges is part of an ideological war in favour of government
control of business on the part of the Obama administration.

But, the objections to profit-making colleges
cannot be dismissed out of hand. We saw in the financial crisis how government
underwriting failure led to a rapid market response, distorted incentives and
created bad outcomes, ultimately creating the conditions for the financial
crash. Private sector educational institutions will respond to incentives too.

In this context, the design of the government’s student
support scheme is very worrying. Government loans will be available to students
and there will be big rewards for failure. The interest rate depends on how
well you do after graduation and how much capital you pay back depends on
whether you are earning and how much you earn. Those whose education adds
little value to them in the labour force will pay back the least.

In this context, perhaps the government should not
require for-profit higher education institutions to provide bursaries to
less-well-off students as non-profits will have to. After all, this target
group is likely to be a large part of the customer base for the for-profit
institutions in any case. Instead, perhaps, there should be incentives for
success. Why not have 70 per cent of the student loan repayable to the
government and the last 30 per cent repaid instead to the institution if it is
a for-profit institution? They then have skin in the game. The incentives of
students, government and the institution will be very effectively aligned.

We then can get the best out of for-profit
institutions and the self-interested complaining of the traditional
universities will carry no weight whatsoever.