IF research: student debt outweighs graduate premium

David Kingman looks at the widespread media coverage received by IF’s recent paper on the cost of higher educationIf_Blog_Mortar-Board-Coins-300x199-300x199

IF’s latest paper, The Graduate Premium: manna, myth or plain mis-selling?, written by Steve Kemp-King, has received widespread media coverage over the last week, demonstrating the high level of concern among the general public over levels of graduate debt.

Higher education mis-sold?

The paper provides a comprehensive review of all the recent research by previous authors which has attempted to measure the size of the “graduate premium” – the boost to earnings which people who attend higher education expect to get from having a degree when they join the labour market.

On the basis of this review, the report claims that the graduate premium has been “mis-sold”: although successive governments have used the promise of a substantial graduate premium as a means of justifying both the relentless expansion of higher education and persistent increases in tuition fees, the size of the premium appears to be reducing for the majority of students (in part because the obvious consequence of more graduates entering the labour market is that the competitive advantage enjoyed by each one will be diminished).

The report traces the history of the graduate premium in political discourse, showing that it was first evoked as a way of raising tuition fees by the then higher education minister Margaret Hodge in 2002, who publicly claimed that the typical degree yielded a return of £400,000 in additional earnings over a lifetime compared to someone who only had two A-levels. The report shows that various attempts to estimate the graduate premium in the subsequent years have reached remarkably different conclusions: research undertaken by the Department for Business, Innovation and Skills (BIS) in 2013 arrived at an average premium of just £168,000 for men and £252,000 for women, even though just two years earlier in 2011 a different BIS study had estimated that the average premium was £121,000 for men and £82,000 for women.

The various attempts to measure the graduate premium have also generally concluded that discussing a single, average figure is highly misleading because the returns to an individual vary so much by subject, institution and the student’s personal background (such as whether they attended a state or private secondary school). An analysis undertaken by the Institute for Economic Affairs in 2014 indicated that statistics show “a very wide range of possible graduate premium, from £400,000 for men studying Medicine and Dentistry to a negative £10,000 for men studying Creative Arts and Design.”

Supply and demand

The report also identified evidence which shows the value of a degree has been significantly watered down in recent years, particularly because a growing range of occupations now require new entrants to be graduates which didn’t do so previously (such as police work or nursing). Research cited in the report suggests that the demand for graduate labour – which is often given as an argument in favour or raising tuition fees so that more people can attend university – has been artificially inflated through this mechanism. The UK now appears to have more graduates doing non-graduate work than any other OECD country bar Japan.

The report’s author concludes that for many students, higher education is being mis-sold – a lot will end up doing jobs where they will earn enough to have to make repayments on their student debt (especially if the government moves the goalposts by reneging on the repayment terms, as they have done recently by freezing the repayment threshold) which could effectively cancel out most of the uplift in salary they get from being a graduate in the first place. While the report definitely isn’t intended to put young people off from attending university, it should make everyone involved in higher education – including students and their families – weigh up very carefully the real value of the degree they are buying or selling.