03/06/2014 08:05 BST | Updated 02/08/2014 06:59 BST

Tuition Fees, the Worst of Both Worlds

The price of Higher Education in England and Wales is increasing and it is likely to increase further. Today, most university tuition fees are around £9,000, but we are already seeing speculation of fees of £16,000 or even £20,000 a year, sums likely to leave many students paying off debts well into old age. But whilst the price may continue to increase, what is not clear is whether this will make things any more financially sustainable. One thing is clear - the current system offers the worst of both worlds for students, universities and taxpayers.

The trebling of the fee cap to £9,000 was never going to be popular with students, but the way it was communicated only served to exacerbate this. Our research with potential students around the time of the change showed a systematic lack of understanding of the repayment mechanism and a real sensitivity to fees. What is now becoming clear is that the actual repayments being made are falling well short due to the current graduate jobs market. Research by two independent think tanks - the Institute of Fiscal Studies and the Sutton Trust - have shown that the Government is now writing off around 45 per cent of student debt. In other words, the price rise succeeded in generating negative headlines, but not in generating revenue!

In addition, by capping fees at £9,000, institutions were inherently incentivised to price at or around £9,000. As students become more aware of the repayment mechanism, there is virtually no incentive for universities to differentiate their fees at all, as reducing the fee below £9,000 simply has no tangible benefit to students.

Indeed, research we conducted more recently showed students are now much less sensitive to fees as they almost all understand how the student loans system works. On this basis, as pricing consultants, our advice to any university would be to price at £9,000!

With little incentive to deviate from charging £9,000 per year, the focus for universities has switched to competing with "up front" benefits like scholarships, subsidised accommodation and entry criteria which the student can benefit from here and now. These schemes can be powerful in driving students' decisions where to study, but the amount spent can run into millions, often with little control or central planning in place, and only add to the perceived "marketisation" of the sector. This is surely not a sustainable solution.

So what to do? Increasing the fee cap would only lead to more of the same. The same incentives would exist for institutions to price to the maximum. Removing the cap altogether is an interesting option as it would likely lead to greater differentiation in fees and, ultimately, to truly value-based pricing. This could drive revenue through average price increases, but would still not overcome the low re-payment rate. This will require revision of the repayment criteria to bring them more in line with today's graduate jobs market.

What is clear is that universities are being forced to make pricing decisions and think like commercial businesses like never before. True marketisation may not be a bad thing for the sector - with fees genuinely linked to the value delivered - but the current model is the worst of both worlds.