Whenever you talk to young people about generational inequality, there is one topic that comes up again and again. But once they’ve finished complaining about the housing market, they will soon get on to the topic of higher education. And no matter what path they pursued, they are likely to feel ripped off.
If they went to university, they will be lumbered with sky-high student debt, which only those on the very highest salaries will be able to pay off easily. If they went down the technical route, they will often feel slighted both in terms of the resource gap with university and the prestige gap that persists. And if they entered the labour market directly, they will find themselves competing with hordes of overqualified graduates for those positions that are available – or indeed locked out of professions such as nursing or policing which have been increasingly restricted to those with formal qualifications.
All of these issues are important. But in this essay, I will focus on the first of them – the university track.
University is one of the earliest ‘adult’ institutions most young people have to deal with. Questions over where to go, what to study, or even whether to go at all start creeping into their lives as early as 15 or 16. Long before they are worrying about saving for a deposit on a flat or whether their new job offers a good pension scheme, young people are thinking about what their post-school path looks like.
For many, university is still the preferred choice. It is seen as the path to a ‘good job’. It is the path their teachers think is best. It is the path their parents would be proudest of. But with the controversy about ‘low-value’ courses and enormous debt piles, are we short-changing young people right from the start?
The figures certainly suggest we are. The Institute for Fiscal Studies (IFS) estimates that 20% of students – about 70,000 every year – would actually have been better off financially had they not gone to university. According to the Office for National Statistics (ONS), 31% of British graduates are overqualified for their jobs. And drop-out rates vary enormously by institution. A record 11% of full-time undergraduates who started their degree courses in 2020-21 dropped out, but that ranged from as low as 1.0% at Oxford to a shocking 31.6% at the University of Bedfordshire.
Let’s be clear. As the IFS has found, most students are better off for having gone to university. And the Exchequer is certainly better off for their having done so. But there are still far too many school leavers who embark on a path they are told will unlock a fulfilling and rewarding career, only to find they had chosen the wrong path or could not meet the university’s standards – or to graduate and realise some years later that they were mis-sold a degree which did little to equip them for the labour market, with no recourse for complaint. Even those who do get graduate work in their chosen field find themselves concentrated in cities, facing extortionate rents, with no prospect of homeownership – as colleagues address in other chapters of this collection. In short, they feel as though the future they were promised if they did as their parents and teachers told them is increasingly unachievable.
This is obviously not good for the graduates themselves. It also less than ideal from a social point of view: as Peter Turchin has argued in his work End Times: Elites, Counter-Elites and the Path of Political Disintegration, political unrest tends to be driven by those who are over-educated and under-rewarded, who have their expectations about their futures raised and then dashed.4
The cost of university
It will come as no surprise that students attending university by and large find themselves graduating with a significant amount of debt. But it may surprise you to know that the typical debt of a US student is around £29,000, compared to £45,600 for a British student. (Of course, America has a twin-track system, with private loans as well as federal. But the average borrower still has much less to pay.)
How did this come about? In 2009, the Labour Government commissioned the Browne Review into the future of university tuition fees, charging Lord Browne to take into account the aim of widening participation and the need to simplify support for students. The Review recommended removing the previous tuition fee cap of £3,000 per year and allowing universities to charge different fees for different courses, putting the responsibility on institutions to prove value for money. However, the decision was left until after the next general election.
In the wake of that election, the Liberal Democrats, who had signed up to a National Union of Students campaign pledging not to raise tuition fees, secured an exemption in the Coalition Agreement which would have allowed them to abstain on any future vote to raise fees. However, they U-turned on this promise – although the Coalition did decide to reject Browne’s original proposal, citing fears unlimited fees ‘could deter some students’, and instead cap fees at £9,000.
In the foreword to the report, Lord Browne argued that the recommendations would give students the ability to make informed choices about what and where they study. He also wrote: ‘[students] do not pay charges, only graduates do; and then only if they are successful’.
The problem is that today, too many students are not informed, and too many graduates are not successful.
The majority of domestic students in England fund their university education through government loans. Students only start repaying these once they graduate and earn an income above a certain threshold. So students embarking on an undergraduate degree from August 2023 will repay 9% of their post-graduate income over £25,000.
The current funding settlement has worked very well for universities (at least until the current bout of inflation, which has driven up their costs while capping their revenue). As soon as they filled a place, they received a guaranteed tuition fee, paid by the student using a Government loan, whether or not that student ever earned enough to repay the state – or indeed received any return on the time and money invested in their degree.
The university therefore only had an upside in expansion. That saw many higher education institutions offering more and more courses with little regard for quality. But for the taxpayer, it was a mixed blessing – not least because they bore most of the financial risk. In its 2021 paper of the same name as this essay, the CPS cited Institute for Fiscal Studies (IFS) data showing that the Government will ultimately reclaim only 46% of the value of the loans it makes, representing an £8bn write-off for every cohort of students.
As for the student, they are largely protected from the downside by the easy terms of the student loan. But they may also experience increasing frustration at finding themselves more qualified on paper but no more employable in reality. Furthermore, even if you are not paying your student loan, it always there looming in the background.
Not having to fund tuition fees upfront is a key element of the tuition fees system across the UK, as is an element of taxpayer subsidy. The former aids in social mobility and the latter is natural, given we accept that having a broad subset of the population educated to university level is a good thing for the country as a whole. Entry rates for 18-year-olds into university rose from 24.7% in 2006 to 38.2% in 2021. But this expansion in the number of young people going to university did not coincide with an increase in the quality of courses.
We also need to consider the quality of education students receive pre-university. Promoting university as a route to getting more high-skilled workers into the workforce only happens if the students have basic skills in the first place. Yet the core literacy and numeracy skills of English graduates were both fifth from bottom among 23 OECD countries.
In other words, in our zeal to widen access to university, we let in too many people without the core literacy and numeracy to get the most out of the experience. Indeed, the evidence suggests that having a degree does not compensate for graduates with low basic skills once they enter the labour market. In 2012, the median monthly salary of a graduate with numeracy below Level 2 was £1,550, while the same for a graduate with numeracy above Level 2 was £2,740; the median monthly salary for a graduate with literacy below Level 2 was £1,520, while the same for a graduate with literacy above Level 2 was £2,650.20.
Furthermore, the OECD found in the same paper that the earnings gain for school-leavers with low basic skills was at least as high if not higher from short professional qualifications as from university degrees.
As a result, as outlined above, we have found ourselves in a situation whereby billions of pounds of tuition fees are never repaid as students do not earn enough in later life. According to the House of Commons Library, the Government only expects around 27% of full-time undergraduates starting in 2022/23 to repay their loans in full. That means taxpayers, not universities, will be picking up the tab for courses which have failed to boost the career prospects and future earnings of graduates.
What is the alternative?
In July 2023, partly in response to the work of the CPS and others, the Government announced a crackdown on ‘rip-off’ university degrees, which in their view were those with high drop-out rates or which ‘leave students saddled with debt, low earnings and faced with poor job prospects’. Under the plans, the Office for Students will be able to limit the number of students universities can recruit on to courses that are deemed to be failing to deliver good outcomes for students (which we now have much better metrics on).
However, this does not address the underlying misalignment of risk between the taxpayer, the student and the university.
There are numerous benefits to attending university which have nothing to do with money. The friendships and relationships formed there can last a lifetime. And the pursuit of knowledge for its own sake should not be scoffed at. But that shouldn’t mean we disregard the financial implications, especially when the costs are borne by the taxpayer both initially and ultimately.
The current system allows universities to get away with none of the financial risk of over-expansion or poor quality courses. We should move towards a system which is fairer to students and taxpayers. In particular, reforming the university funding system to link institutions’ funding more closely to graduates’ earnings will help prevent school leavers with poor basic skills being saddled with debt from courses which will not improve their future earnings and instead encourage them to take alternative routes.
In such a system, the government would loan funding to universities who themselves lend directly to students, with students repaying universities who in turn repay the government. The repayment would mirror the current system: a certain percentage of post-graduate income above a set income threshold, with a cap on the amount an individual student would repay.
This system would make universities directly accountable for the future income of their students and incentivise them to focus on providing courses which deliver the best financial return. School leavers would be less likely to be lured into low-earning, low-value courses and away from alternative more productive routes such as apprenticeships. This is because the universities themselves would carry the risk of lesser earnings across the graduate’s lifetime. The cap would also mean universities would not be able to rely on a smaller pool of high-earning graduates to subsidise others, although inevitably there would be an element of cross-subsidy.
As mentioned above, the IFS estimates that the long-run cost to the government of the 54% of unpaid fees and maintenance loans from each cohort that ends up being defaulted on is £8bn. Helping students choose degrees with better long-term earning potential will drive up the repayment rate, helping the government recoup more of the cost of student loans.
Full repayment is highly unlikely given the current high rate of default – indeed, if the Government demanded 100% repayment from universities under the proposed new system, many would be forced to dramatically cut back the courses they offer. But if a saving of half that were made, the Government would have a significant pot of money with which it could directly fund bursaries for expensive, desirable and under-funded courses such as medicine or engineering. The savings could also be used to better advertise and support alternatives to university, such as apprenticeships and technical education, opening up these pathways to more students who would otherwise enrol on unsuitable and unrewarding degrees.
Overlaying these changes, the Department of Education should require all universities to make publicly available information on the average wage of graduates of each course, and have it clearly stated on advertising materials to aid in students’ decision-making.
Ultimately this system would reward universities that offer students the best return and scale back courses that do not offer any enhanced career prospects.
Universities would still be free to offer courses with lower earnings potential, and students still free to take them – but with more openness and transparency. Students would no longer find themselves blindsided by the poor return on their investment when taking courses such as creative arts, which research showed has zero effect on earnings for the average female graduate and a negative effect for the average male graduate.
How best to educate the next generation is one of society’s most important considerations. Our economy depends on training not just doctors, engineers and lawyers but teachers, psychologists and business leaders. For many, skills for these professions have to come from classroom instruction and practical placements. But university also provides young people with a range of intangible benefits – the freedom of moving away from home; improving presentation, research and writing skills that will serve them well regardless of their chosen profession; the chance to make new friends or potentially meeting a future spouse.
That does not mean that we can ignore the shocking statistic that as many as one in five graduates would have been better off in the long-term had they not gone to university at all – especially given the size of the debt students are incurring, the drag on their earnings as they struggle to pay it back, and the loss to the Treasury from the extraordinarily high default rate. Changes to the funding system would make universities more accountable for the outcomes of the courses they offer and give young people more information, allowing them to make more informed decisions about their career goals.
By reducing the number of people taking courses with low earning potential, we can not only get better return on investment for the taxpayer, but reduce the number of young people who feel frustrated and betrayed when they discover their supposedly career-boosting degree is not worth the paper it is printed on.
The measures outlined here will not fix every problem with the education system, especially not the creeping credentialism that limits people without a degree from applying for roles where a degree is an entirely irrelevant qualification. But we can start to arm school-leavers with the knowledge and ability to critically evaluate the costs and benefits of university education, so they can make informed choices that have a positive impact on the rest of their lives.
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