With the first cohort to experience the 2022 changes to student loans having begun university, now is a good time to take stock and assess the state of the graduate premium. Toby Whelton, IF volunteer, investigates.
What is the graduate premium?
The graduate premium is the difference in the average income between graduates and non-graduates i.e. the value added to individuals’ employment prospects through completing a degree. It is the predominant metric in assessing graduate outcomes and is often cited to justify the extortionate costs of higher education tuition.
The median nominal graduate premium in 2022 was calculated by the Office for National Statistics (ONS) at £11,500, which is 42.5% higher than a non-graduate wage. Once adjusted for inflation, that graduate premium fell to £8,000 – 29.75% higher than a non-graduate wage.
For those aged 21-30, the premium in real terms was 24.2%. Despite the proportion of the working population with a degree ever increasing (17% in 1992 to 42% in 2017), the graduate premium seems to be holding up.
With promises of higher earnings, it is little wonder why over half of the population now pursue higher education, yet the uncomfortable truth is that many graduates will not experience a wage premium but their student debt will remain.
The ‘true’ graduate premium
There is more to the graduate premium than would first appear. Digging a little bit deeper, it becomes clear calculating the graduate premium is more disputed than government statistics would first suggest.
Recent academic studies have sought to control more variables in calculating the graduate premium. Graduate earnings are compared not just to the general population of non-graduates but to those with A Levels, controlling for “non-cognitive abilities”, socio-economic status and parental attitudes. This is undertaken in order to isolate the causal impact of the degree.
The picture is then far less rosy. The overall nominal wage premium becomes 30% and just 11% for young graduates. Once adjusted for inflation that drops further to 20% and 7.5% respectively.
Over time a worrying downward trend is uncovered. From 1997 to 2019, the graduate premium has declined by as much as 20% in some regions, with a country-wide decrease of 10%. This decline has been mirrored for young graduates’ earnings. For those born in 1970, the premium at 26 years old was 19%, this has dropped by 8% for the 1990 cohort.
On top of a declining premium, graduates are increasingly underemployed. One third of non-recent graduates (those who graduated more than five years ago) are employed in non-graduate roles. This trend is set to worsen, with graduates born in the last two decades considerably more likely to be overeducated relative to their employment.
The reality is that the true graduate premium is much lower than it is often represented and only getting worse.
The variability of the premium
Not all graduates enjoy the same premium. A wage premium is linked to a number of different factors.
One of these is the classification of the degree. Over the last 20 years, the premium for a lower second has plummeted from 14% to a mere 3%, which is effectively negligible. With students from lower socio-economic backgrounds more likely to obtain a lower second, this trend poses a worrying threat for future social mobility.
The most decisive variable is subject choice. In STEM subjects the premium has held steady, even increasing as high as 60% for some. Meanwhile, other degrees have experienced sharp reductions with a decline of 25% in the graduate premium outside of London. For non-STEM, non-LFG (Law, Finance, Management) subjects, the nominal premium now sits at around 20%.
Regional variations in the premium demonstrate factors go beyond just the degree. In London, the graduate premium has remained consistent, at around 40%. This is not the case everywhere. The graduate premium has fallen as much as 20% in the North East, with regions such as Yorkshire, the South West and the East Midlands falling by 15%. In these regions, graduates are nearly twice as likely to be underemployed than in London.
There are of course other variables, such as the sector of work or the selectivity of the university. With such dramatic discrepancies, it is naive to assume all or even most graduates enjoy a notable premium. For many, especially non-Russell-Group, non-STEM students from neglected regions and poorer socio-economic backgrounds, a degree often fails to deliver the promise of increased earnings yet the student debt taken on, remains.
Costs of university
The costs of repaying student loans are not factored into calculations of the graduate premium. This made sense for previous generations, who paid far less or nothing pre-1998. It was a near given that the premium would offset any costs. However, that is no longer the case.
The majority of graduates will not pay off their debt, meaning repayments act as an effective 9% graduate tax, not a loan. Gains in earning potential are partially cancelled out by the increased tax burden on graduate workers.
In 2021, this group was taxed as high as 50% once they went beyond the student loan repayment threshold. While the 2022 Autumn Budget’s 2% cut to National Insurance Contributions may appear to have eased young graduates’ tax rates, the freezing of income tax thresholds and the fiscal drag entailed, will increase the tax take.
Nor does the “graduate tax” affect all graduates. The wealthiest 10% do not take out student loans, while the highest-paid graduates can pay their student loan off quickly enough for it to serve as the intended loan. The lowest earners will not meet the repayment threshold.
Those hit the hardest are the middling, the JAMs — the just about managing. For these graduates, the added burden of a life-long graduate tax delays key life milestones of home ownership, starting a family and saving for retirement.
In 2022 the government restructured student loans, with the current 23/24 cohort the first to take the new Plan 5 loans. This has served only to increase the fiscal burden faced by young graduates.
Before, student debt would be cancelled 30 years after completion of the degree. This has now been upped to 40 years, likely spanning most graduate’s working lives with some people expected to be in repayment into their sixties.
The repayment threshold has been decreased from £27,295 to £25,000, fixed until 2027, where it is then ‘planned’ to rise with CPI inflation. This would mean a graduate earning £30,000 a year would pay almost double towards their student loan, an additional £207 a year. The £27,295 threshold for previous cohorts has also been frozen. Inflationary pressure will drag many students over the threshold to pay more tax despite experiencing no wage growth in real terms.
No evidence to raise fees
A lack of scrutiny of government statistics has obscured the current state of the graduate premium. Despite the graduate premium’s bleak state, it is still too often held up as a reason to increase tuition fees.. For the younger generation of graduates, the premium is low, declining and near negligible for many. This is at a time when inflation and reforms to student loans have increased the fiscal burden on recent and future graduates.
There are still many reasons for individuals to go to university, yet increasingly the guarantee of greater earnings is not one of them.
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