21 April 2016
Is a university education worth the money?
by Frank O’Nomics
The whole debate about the costs of a university education has been brought back into focus this week, following the release of a study by the Institute of Fiscal Studies, which compares the earning of graduates against non-graduates 10 years into their careers. Ever since students started to pay for their degrees, and particularly since the cap on fee payments rose to £9,000 per year, prospective undergraduates have agonised over whether the acquisition of such debt (around £40,000 once the maintenance allowance is included) is worth it when compared to their increased earnings potential.
If one looks at the bigger picture there is no doubt that, overall, a university education does pay. Firstly, graduates are much more likely to be in work, with non-graduates twice as likely to have no earnings after 10 years, and median earnings for graduates at this stage are £30,000 against £20,000 for non-graduates. However, the IFS study of 260,000 graduates shows that men from more than 1 in 10 universities (23 out of 168) were earning less than non-graduates 10 years after graduation. In the case of women the statistics are much better, with only 9 out of 166 universities producing graduates earning less than the non-graduate level. For potential students the key is to assess just why they want to go to university and, if the reasons are largely economic, which courses and which universities give the best prospects of increased earnings. There are also important questions for the government to answer, as it may be hard to justify the cost to the taxpayer of funding those universities which produce students who are unable to repay their loans.
When it comes to looking at the courses that produce the best average earnings for graduates there are few surprises. Medicine comes out top in terms of median income, at around £50,000 for men and £40,000 for women 10 years after graduation, with economics coming next at around £40,000 for men. If one looks at the highest paid, then economics wins out, with around 12% of men and 9% of women earning in excess of £100,000 10 years on. Those at the bottom of the scale are also not surprising, with the creative arts generating median incomes of £17,900 for men and £14,500 for women, giving little prospect of loan repayments which only start on earnings above £21,000. Other subjects which produce low median earning are languages, communication and, very surprisingly, veterinary studies.
Unfortunately the study stops short of naming the 23 universities which produce graduates with average earnings below those of non-graduates, and they have only named 17 universities that are the highest performing, when the Russell Group list runs to 24. Some of this may be down to the limited resources available to the IFS, but there may also have been a reluctance to generate the pressure from those who would want to reduce funding to universities which produce graduates with incomes lower than non-graduates. Nevertheless, this is data that many will ultimately want to be available. As to the universities producing the highest earners, there is again little that will surprise, with the London School of Economics at the top (over 10% earn over £100,000 10 years after graduation), closely followed by Oxford and Cambridge.
One of the bigger concerns may come from a focus on gender as, while there is a smaller proportion of women earning less than non-graduates, it is clear that median pay levels after 10 years are still well below those of men. There may be the usual arguments surrounding career breaks, but these would seem to have less relevance given the focus on the first 10 years of a career, and the disparity for creative arts graduates above is especially worrying. The other big issue is one of background. The survey illustrates that graduates from a wealthy background earn more than those from poorer households, even when they have the same degree from the same university. Male graduates from the richest 20% of households earn on average £8,000 more than those from the remaining 80%; for women the difference is £5,300. These are significant differences and a sad illustration that there are still issues of social mobility to be addressed.
There is a danger that, in using data from studies such as this, we focus purely on the economics. Many degrees are studied purely because they are rewarding in a life-enhancing sense to the individual, who accepts that their earnings prospects might be restricted. Further, many degrees carry a social good that will be regarded as a cost worth paying for a mature society – the government should be comfortable with ultimately writing off student loans to those who will become engaged in occupations that are socially essential, and cutting creative arts courses purely because of limited earnings potential would leave us culturally and intellectually impoverished. Nevertheless, there are key questions for the government, given that reduced earnings potential will leave many much less likely to be able to repay their student loans. Debts are cancelled if they are still outstanding 30 years after they become eligible to be repaid and, with repayments at 9% of earnings above the £21,000 threshold, those on the £30,000 median income will be repaying at a rate of less than £1,000 per annum. Debts of £40,000 take a long while to repay at this rate, particularly once you add in annual interest of RPI plus 3% – even in the current environment of low inflation the student loan interest rate is 3.9% for this year. Recent estimates suggest that 45% of graduates will not earn enough to repay their loans, with the economics consultancy London Consultants estimating that, if this figure were to hit 48.6%, the costs of the system would be greater than that which existed before universities started to charge students.
For a potential student there is clearly some highly subjective cost-benefit analysis to be done in deciding whether to go to university. Whether the large numbers applying are really doing this might be questioned, given that in 2014 225,000 18 year olds were accepted into a full-time place at university, the most ever recorded. The most important consideration may be how much do you really care about the degree subject but, if earnings potential is a major factor, a careful analysis of the course and venue would seem to be critical.
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