Is it worth going to university? Part I
So, you’ve got your A-level results and are now having to decide whether or not to go to university. On the one hand a degree should lead to higher wages throughout your lifetime but on the other there is the issue of having £27,000+ of student debts to pay off. So the big question: is it actually worth it?
Economics studies that have addressed this directly suggest that, on average, a university degree is a worthwhile investment with a positive expected rate of return – indeed in many cases a rate of return that compares favourably with anything the stock market might offer. Surprisingly, this remains the case even with the fee level increased to £9,000 per year: recent work by Ian Walker and Yu Zhu (2011) shows that even with such an increase in tuition fees the returns hold up.
What does make a difference to the expected return is the subject you study and how hard you study it. Variation in lifetime returns by broad faculty is particularly clear for men: with a £9,000 fee the estimated rate of return to a degree in Law, Economics or Management is around 29% if you get a 2:1, whereas a 2:1 degree in other social sciences, arts and humanities has a return of around 6% over your lifetime, compared with not going to university (but having the grades to do so). Only managing a 2:2 drops the return by around 4 percentage points. For women the picture is bright whatever the area of study – the average returns are in the high teens for all faculties, with even the lowest estimated return (for a 2.2 in an arts/humanities subject) more than 14%.
So the numbers suggest that on average investing in a degree is a sound investment and will pay a decent return over and above what you would otherwise have earned during the course of your working lifetime.
However these numbers come from aggregating across universities and across courses within broadly defined faculties. Another recent study (Chevalier, 2011) looks at variation in earnings returns within specific degree subjects, for the cohort of graduates who left university in 2003. The finding here is that variation in wages three years after graduating is large across subjects (as Walker and Zhu suggest) but that the variation within a subject is considerably larger. Moreover, the quality of institution attended matters for the estimated return too.
What students really need to know is whether going to University X to read subject Y is expected to give them a positive lifetime return in wages. At present this information is just not available which is a problem – I’m not sure that we would expect people to invest £27,000+ on anything else without a more accurate idea about the likely return on the investment and the variance of that return. All of the requisite information is in theory available and if it could be released (to researchers) and linked together it would provide students with a much more precise picture allowing them to make informed choices about where to go and what to do.
At the same time, what is also needed is much better communication – particularly to young people from less advantaged backgrounds – of how university is paid for. It is not the case that students pay the £27,000+ cost of a university degree. Graduates do. And only if they are earning £21,000 or more per year. If they don’t earn at least this amount, they don’t pay back a thing. And if they are earning above this threshold, a little is deducted directly from their salary each month. Moreover, these student loans are the cheapest form of borrowing – the interest rate is inflation plus a maximum of 3% per annum. Compare this with a typical credit card: 18% APR – that’s about inflation plus14%. So student loan debt is very different to having £27,000 on your credit card which is racking up 18+% APR and will destroy your credit rating, chances of getting a mortgage and risk a visit from the bailiffs if you can’t pay it back.
It is clear that the variation in expected returns by subject and also within subject means that there is risk associated with the investment in a degree, but this risk is insured against by these loan repayment arrangements and having student loans should not damage your credit rating or undermine your chances of getting a mortgage.
So while we can be pretty sure of the costs of a degree and how it is paid back over the lifetime, it is less clear exactly what the expected return to any specific course at a particular university will be. Nevertheless, the statistical evidence that we do have suggests that if you work hard enough then whatever course you choose to do, there will be a positive lifetime wage return on your investment.
Walker, I. and Zhu, Y. (2011). `Differences by degree: Evidence of the net financial rates of return to undergraduate study for England and Wales’, Economics of Education Review, doi: 10.1016/j.econedurev.2011.01.002
Chevalier, A. (2011). `Subject choice and earnings of UK graduates’, Economics of Education Review, doi: 10.1016/j.econedurev.2011.04.007