Private Colleges, Public Funding and A Coming Scandal

Times Higher Education reports that two private colleges in London has received more money in public funding than the London School of Economics and School of Oriental and African Studies. (See story here) While we may argue on the merits of giving public money to private providers, as is the case in myriad public services, even the staunchest free market advocate may accept that this is perverse. One can't even argue that this is market forces at work: There is no way to explain why British students will prefer almost unknown institutions over the better known universities, except that we have managed to craft a system which has created all sorts of wrong incentives for over-recruitment. It seems that despite all the warning signals of the student loans scandals from the US, the government in England has managed to create a system and break it within barely two years.

Indeed, one would argue that stories such as these is a mere case of jealousy of the public sector. But that obscures the point that there is no market explanation for such a skewed student preference. Except, of course, the explanation that since the government left the student recruitment by private providers uncapped, and made the silly declaration that the student numbers will be capped from next year on at this year's recruitment levels, they created a perverse incentive for all private providers to over-recruit. 

As we already know, most of these recruitment is in Higher National Diploma courses (rather than university degrees), which essentially means that the students did not need to satisfy any entry criteria to get into the colleges. Add to this the fact that the 'students' were entitled to some funding towards accommodation etc., one can understand why we saw education advisors setting up stalls in shopping malls last summer: They were selling easy access to loans which one does not really have to pay back rather than education.

Indeed, it would be unfair to paint all private providers with the same brush, but one can see that the callous policy design has broken the system before it was even in place. The Chancellor's announcement of removing recruitment caps from the public universities may placate the Vice-Chancellors, but this is unlikely to solve the coming problem of non-completion that the sector will see in the coming months. Indeed, the impact may not be immediately visible as the number of students may still be relatively small in private sector (despite massive growth, it is less than 2% of approximately 2 million undergraduates in the system) and the fact that the HND courses have an open-ended end date and a student may not be considered as a drop-out for a very long time. However, it may be fair to assume, given the recruitment dynamic, that the private sector has already set itself up to be a disproportionately big contributor to the student loan defaults. Despite all the market-friendliness of Britain's current government, they seemed to have missed all the lessons about economic incentives and misunderstood how private businesses operate.

The fact that the government is completely blind how private institutions are operating is also clear from the tale of one private institution, which seems to feature prominently in the list of student loan recipients. This has effectively created a franchise across London, despite the fact it is clearly illegal to do so, by providing access to student loans to private colleges which were suffering badly after the government clamped down on international students. This enterprising private institution now has branches all over London, which are basically independent recruitment operations, getting local students on the promise of cheap loans and putting them under loans provided through this umbrella college. The Student Loan Company's purely paper-based vetting processes are somewhat blind to such practices: This operation has therefore flourished and had manifold growth.

The access to student loans for many of these private providers remain frozen, and I am certain that the Student Loan Company will be far more careful in expanding the system than they have been so far. However, it is important for the Government to crack down on abuse early in the day, and withdraw the loans from some of the 'students' who may have little incentive to study other than access to loans.  This is also in the interest of the credibility of the private education sector, and of its more responsible providers, that such abuses are reported and controlled, because otherwise the sector will remain blighted just as it did in the wake of foreign students' issue. And, for the wider education community, this is yet another reason to engage in the debate of what's the best way to develop a responsible private sector, rather than taking this as yet another excuse to disengage.


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