Tag: Student loans

The financial return on investment of a degree

The average student from a low-income background will borrow £53,000 to attend a three-year degree at university, which rises to £28240.75 with interest if left unpaid over 30 years. The first £27,750 covers tuition fees, with the rest used for maintenance costs, including rent, food, and socialising, with four-fifths of students living away from home to study.

The graduate or professional premium is a term used to describe the increase in average wages that university graduates can expect having achieved a degree.

futurefinance.com

Students are told that going to university is an investment. The UK Government has claimed a graduate premium of an additional £400,000 of income over a lifetime. 1999 Age-earnings reported The Economic Journal showed the premium at an average of £410,000, the premium has reduced to just £100,000.

Over a 45 year working life, £100,000 is just £2,222 per year before income tax and national insurance. This increase in earnings does not cover the interest accruing on the loan. According to the Institute of Fiscal Studies, 20% of students would have been earning more ten years after graduating if they had skipped university and gone straight into work instead. 

It is important to note that the graduate premium is an average, and the return differs significantly by gender and subject area. According to the Institute of Economic Affairs, male Medical and Dentistry graduates earn an average of £400,000 more over their working lives than non-graduates. Male Creative Arts and Design graduates earn £10,000 less than non-graduates over their working lives.   

There are many reasons to go to university. Still, the financial return on your investment of delaying starting your career by three years and the £28k-£53k dept is only financially beneficial if you choose your degree specifically for that reason. 

Who pays for Higher Education?

One of the biggest questions in HE currently is ‘who pays’. In the UK, students can get government-backed loans for both undergraduate and postgraduate long courses with the Government topping up the course costs. These loans act more like a graduate tax than a traditional loan, with payments only starting once graduates earn above a threshold income and remaining totals cancelled after 30 years.

To support the 49% of students that do not go to a university, in 2016, the British Government introduced the Apprenticeship levy to help fund apprenticeship training. Companies with an annual pay bill of over £3 million pay the levy at a rate of 0.5% of the total bill. This money can then be claimed back for the hiring of apprentices. The levy has led to the growth of higher and degree apprenticeships where student employees can do on the job training for 80% of their time and use the remaining 20% for formal study towards a degree or similar qualification from level 4 to 7.

The next piece of the puzzle is short courses for vocational or technical skills. The idea is that individuals can take short courses to boost their skills to help them get a job and that these ‘micro-credentials‘ can be stacked together into larger qualifications as a signal of proficiency in a particular area. Currently, these qualifications are paid directly by individuals or their employers, but this might be changing.

The UK Government has been making noises about lifelong learning funding or loans to be used for collections of shorter courses over a lifetime. Providers are looking for easier ways for people to pay for courses including instalments or even free upfront but then paying through a percentage of income after graduation for a pre-specified timeframe.

Today I had an email from a private company offering a partnership for an interest-free ‘learn now, pay later’ services similar to those eCommerce sites have started to add to their checkouts. The economics of HE is changing, and the question of who pays becomes more critical. People are retiring later, and technical skills become more important to get into and maintain high-income roles, and employers are struggling to find people with relevant skills. If we can make it easier, and cheaper, to gain the skills needed, society and its individuals will benefit.

Let me know on Twitter if you have found any interesting ideas on paying for higher education.