The mis-selling of university degrees

Antony Mason says it is no wonder that prospective students are asking “Is university worth it?” Do the math(s)

When New Labour proposed variable (“top-up”) tuitions fees in 2003, it was suggested that student debts of, say £20,000 were a good investment, because the average graduate – over the course of his or her career – will earn some £400,000 more as a result of having a university degree.

This benefit has become known as the “graduate premium”.

Downscaling

£400,000 definitely sounds like a healthy profit, but it turned out to be a premium that was compared to the average salaries of the rest of the population as a whole, including low-paid manual workers. It was a meaningless statistic.

So when David Willetts, Universities Minister, announced in 2009 that university tuition fees would be permitted to rise to a cap of £9000 per year, the graduate premium was priced at a more modest estimate of £100,000.

This figure purported to compare average graduate salaries with those who left school with two or more A levels. At least this was now comparing like-for-like.

£100,000 sounds a lot at first glance, but remember: this is the premium that is acquired over a whole career – perhaps 45 years. That’s £2222 more than non-graduates per year: not a vast amount.

After 2012, student debts are likely to amount to some £40,000 on graduation. Take that off the £100,000, and your graduate premium is down to just £1333 per annum.

Guesstimate

The £100,000 graduate premium is not a scientific figure. How could it be, when trying to predict the job market 45 years into the future? In fact, it is a figure that was conjured up in 2001.

For this reason, the Department of Business, Innovation and Skills (BIS) is currently trying to review and fine-tune its graduate premium figures, and has been calling for expressions of interest (deadline 19 August) from organisations that can undertake the detailed research – and break it down into more precise categories, such as by institution, by subject and by ethnic background.

Figures to chew over

Meanwhile some more detailed research has been carried out, notably by London Economics (“one of Europe’s leading specialist economics and policy consultancies”). Figures published in June 2011 suggest an average graduate premium of £108,000. For men it is £121,000, and for women (who are likely to leave the job market for some part of the career to raise a family) £82,000.

These figures are just averages. The highest graduate premiums (£152,000 to £403,000) relate to professions that are linked to a limited number of university subjects, such as medicine and dentistry, law, architecture, veterinary sciences, engineering and computer sciences. Education hits about the average. These are all career paths for which a university degree is a sine qua non. But some university subjects are predicted to yield little or no premium at all – or even a loss against a £40,000 debt. These include creative arts and design, history and philosophy.

In other words, many graduates will not benefit from the graduate premium at all.

Payback time

It is fairly simple to borrow money from the government to pay your way through university. You can take a loan to cover tuition fees (£9000 a year for the usual three-year course = £27,000); you can get a loan for living costs (outside London £5500 for three years = £16,500). That’s £43,500 in total.

If you come from a low-income background, the government will help soften the costs with a grant, which does not have to be paid back. The maximum grant is £3,250 a year (over three years = £9750), but you have to come from a household earning less than £25,000 to qualify for that. As the household income rises, the grant tapers off to zero at the threshold of £42,600 .

So it is perfectly reasonable to predict that graduates will leave university with an average debt of £40,000 after 2015; in fact, it will probably be more.

How do they pay that off? Well, they won’t have to pay anything off until they start earning more than £21,000 a year. If they earn more than that, 9% of the excess sum will be deducted to start paying off the loan.

On this basis, if you earn £40,000 per annum, it will take more than 23 years to pay off your debt; if you manage somehow to earn £60,000 from the start it will still take you 11 years.

Take comfort if you earn only £30,000 per annum (remember that the average salary at present stands at £24,000): it would take you 49 years to pay off your debt, but in fact the government has promised to write off any outstanding student loans debts after just 30 years. That’s good: when you are in your 50s, and might be thinking of contributing to your children’s university fees, you will at least no longer be paying off your own.

These are crude figures, quoted as a rough indicator. They do not take into account  the general increase in salaries that will undoubtedly occur over the span of future careers; on the other hand, neither do they take the interest on the loans into account – which will add considerably to the sums that have to be paid back.

From the start, your outstanding loan will be acquiring interest at the same rate as the Retail Price Index (RPI), currently at 5%, while you are not earning more than £21,000; go over £21,000 and the rate of interest rises on a sliding scale to a cap of RPI + 3% (thus currently 8%) when your earnings exceed £41,000.

Rich rewards?

New Labour and the present Coalition government have always casually claimed that university degrees yield a bounty that makes the cost of university education worthwhile.

A number of surveys have concluded that, yes indeed, graduates in many jobs earn more than non-graduates, to the tune of somewhere between £4,000 and £10,000 more per year. But most of them still don’t earn enough to pay off their student loans in 30 years. The Office of National Statistics recently reported that the median salary from graduates aged 22–64 is £29,900: in other words, half of all these graduates are earning less than £29,900.

Think of all the valued jobs that require university qualifications that are never likely to be highly paid: social worker, scientific researcher, museum curator, archaeologist, forestry manager, astronomer, university lecturer.

Yes, you have to have a degree to be a university lecturer (normally). But qualified lecturers are usually on a pay scale of somewhere between £21,000 and £35,000. So, paradoxically, even at the top end of this scale, university lecturers will never pay off their own university loan in full.

It’s the money, stupid

This new policy of indebting students is based on a monetarised vision of what universities are about. But universities have never primarily been vocational training schemes. Since the Renaissance they have been cherished because they provide forums for ideas and research, much of which has no clear price tag.

Universities provide many intangible benefits which cannot be easily costed. It is where many people gain their first experience of living away from home, and so offers a space where a generation can move from school age to adulthood among a peer group.

The value of the various networking opportunities that university provides – often with students of other nations – shouldn’t be overlooked either. Start-up companies are often founded by people who were at university together: Facebook is just one example.

This is the kind of environment any government should be investing in. Instead, the current government is now creating a barrier to entry to tertiary education which their generation(s) never had to face in their day. From this perspective it can be seen as an intergenerational issue: one generation depriving another of a benefit it has inherited.

What has happened, of course, is that universities have expanded massively to meet the government policy of extending tertiary education to as many a people as possible: New Labour proposed that it should reach 50% of the population, and today it stands at about 40%. This has proven unpalatably expensive.

So now the government argues that taxpayers should not have to fund the advantages gifted to university students. “Taxpayers who don’t go to university tend to earn less than those that do,” argues David Willetts, “so it’s reasonable for graduates to contribute more to the cost of their education, especially given the economic problems we face as a country.” Previously 60% of the costs were funded by the state, now this will be reduced to 40%.

The same arguments have not been raised about the state education of school pupils who choose to stay on after the age of 16 to do A levels. Why not? Because education provides a national benefit. And it is a benefit that serves not just current generations, but future ones as well.

Well, that argument can be given up as lost. But it is at least the government’s duty to sell its scheme honestly. University education will from now on be expensive, and will incur considerable debts that will take all but the richest or highest-earning members of society years to pay off, if ever. Graduates may never see the promised financial advantage. Quoting a graduate premium of £100,000 is a misleading simplification.

Chaos will ensue

Universities are likely to be a state of disarray for some years. As students do the math(s), they will realise that many courses are just not going to bring the career dividend that justifies their costs. Universities meanwhile will realise that they are going to have to increase their spending to match the new consumer demands of fee-paying students – or cancel courses. Arts and humanities departments – even whole universities – are under threat.

UK universities are an industry that attracts huge number of foreign students, and an estimated £5.3 billion of foreign income each year – £8.5 billion if their living expenses are also taken into account. This will be in jeopardy if the currently high standards of UK universities are undermined by turmoil.

With the potential loss of much of this foreign income, the massive loan book (clearly underestimated by a government that did not predict that so many universities would charge tuition fees of £9000), and the likelihood that many graduates will never pay off their entire loan, one really wonders if the government has done its maths.

Some hope has been expressed that, after a few years, the universities will settle more comfortably into the successful but complex US-style fee-based system: “For two or three years there will be a drop in enrolment, after which numbers will rise,” predicts Terence Kealey, vice-chancellor of the University of Buckingham (Britain’s only private, or non-state-funded, university to date). “If graduates earn more and university education gets better, the graduate premium will grow. As universities get better, more people will go to them.”

Possibly. And if the opposite happens, the government could be accused of mis-selling degrees, much as endowment policies and life insurance have been scandalously mis-sold – though I wouldn’t count on any equivalent kind of compensation.

Posted on: 21 August, 2011

3 thoughts on “The mis-selling of university degrees

  1. Frank

    Churning out too many degrees is a business & universities are loath to admit this. The more degrees conferred the less they are worth. I think people are cottoning onto this long at last.

  2. antony Post author

    The BBC has recently produced an excellent Student Finance Calculator with a direct bearing on this subject:

    http://www.bbc.co.uk/news/education-14785676#student_finance_form

    It lets you adjust certain conditions to see how much a person taking out a loan under the new student finance arrangements would end up paying off.

    Most telling of all is the fact that graduates earning the national average salary will never fully pay off their loans – by a long chalk.

    Try changing the loan box sum (set at £9000) to a more likely £14500 per annum, and the results are shocking. A man earning the national average salary would pay back nearly £33,000 of his loan, but have £29,000 (which includes interest) written off after 30 years.

    Because the difference between career average salaries for men and women are so great, the situation for women is even more startling. A woman earning the national average salary will have nearly £46,000 written off after 30 years, having only paid just over £1,000 back. (The article shows projections of how salaries rise over a career: see the statistics beneath the graph.)

    So, if graduates earning average salaries fail to pay off their loans in full, who does? Well, according to the BBC Student Finance Calculator, you would have to earn something like £30,000 at the start of your career, rising to £70,000, to cover the loan in 30 years. That is a salary 40% above the average.

    As a back-of-the-envelope calculation, I would suggest that in 30 years’ time the government will be writing off at least £9 billion a year of student loan debt, and more like £14 billion. Note that current total funding to universities by the Department of Business, Innovation and Skills stands at £14.5 billion (2009-10).

    It looks like a classic example a government solution that gets the problem off today’s balance sheet, but ties the hands of future generations.

  3. M

    If labour had not introduced the ridiculous and utterly unnecessary targets for university graduates, we would not have so many young people today, who either drop out of university because they are unsuited to academic life or hold/studying useless degrees.

    Because too many were encouraged to go to university, employers simply upped the entry criteria for jobs – to graduate only, when the same jobs were previously open to non-graduates.

    Yes, we will always need university graduates from certain disciplines – however in my opinion if employers were to open their doors, once again, to holders of decent A-level results, they will only see benefits, as these employees will be happier without that mortgage sized millstone of debt, accrued from tuition fees, hanging around their necks!

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