On Wednesday (16 February) the universities minister, Michelle Donelan, gave a speech at a Ucas event in which she rightly drew a comparison between credit cards and university places. The first is sold as a risk, one that can only be advertised with a clear statement about its future effect on the customer’s finances, while the latter is sold – to teenagers – as an investment that is invariably sound.
There is arguably no better example of market failure in Britain than the way in which university degrees are priced and sold. Even our overheated housing market is more rational than higher education, a market in which products that differ wildly in value are sold for exactly the same price to consumers who buy with debt, and from whom the real value of these investments is hidden.
Later this year the Office for Students (OfS), which regulates universities, will publish new rules on “the minimum performance to which students and taxpayers are entitled” in university courses. The initial consultation run by the OfS suggests tens of thousands are currently enrolled in courses that don’t meet its minimum standards.
The consultation is a good thing, but it won’t change the fundamental issue that some courses have a much higher financial value than others, and that not all consumers are equal.
A medical degree, for example, is ridiculously cheap at £9,250 a year: the actual cost of provision is just under £18,000 a year (according to the DfE’s most recent costing study report). So at the point of delivery, a domestic medical student gets their degree at nearly half price.
How can universities afford to make degrees in medicine such a bargain? The answer is partly that they offer other degrees, many of which are not bargains. The average cost of a degree in English or modern languages, for example, is hundreds of pounds less than the standard tuition fee. Tuition fees are only one part of university funding; they also receive money from central government, endowments, and other means. But it is fair to say that people who are going to become doctors have their education subsidised, to a certain extent, by people who are going to become librarians.
But fees are only the beginning of this inequality. The real value of a degree in medicine or economics comes from the net discounted return (money in the bank, after the cost of borrowing, tax and everything else) that it is worth to a student in their lifetime. In both subjects, this comes to around £500,000 – two houses’ worth of solid equity by retirement.
In sharp contrast, a person studying creative arts not only overpays for their tuition, but can expect – according to the government’s most recent audit – to earn less than if they hadn’t gone to university. Overall, 15 per cent of female and a quarter of male graduates would have been (financially) better off not going to university.
A degree in a profitable subject is a good investment compared not just to other degrees but to almost anything else. If a medical student pays £46,250 in tuition fees and realises half a million in net gains over an average-length (35-year) career, that’s an average annual return of just over seven per cent (although it’s actually better than that, because this is a net return made out of borrowed money). A three-year economics student does even better. Such degrees are therefore a considerably better investment than the FTSE 100 (which makes an average annualised return of 5.77 per cent), and they dwarf the performance of the UK’s best fixed-rate Isa, which pays 1.77 per cent interest. In that Isa, for £46,250 to deliver the same return as the average doctor’s career would take at least 135 years.
This system not only gives a huge advantage to the people who are most likely to become high earners, but a particular advantage to the men who become high earners. Across all subjects, the government’s study (conducted by the Institute for Fiscal Studies) found that the pre-tax discounted benefit of going to university was £260,000 for women, and £430,000 for men.
[See also: Keir Starmer’s tuition fees U-turn ignores the real problem with the system]
In this irrational market, women who want to invest in a university education are asked to believe – despite centuries of evidence to the contrary – that things will quickly change, and they will earn as much as men over their lifetimes. This is a bit like your bank deciding to double your mortgage payments because it’s pretty sure interest rates will be a lot higher in 20 years.
Younger workers are already living with the results of such thinking. In the 1970s, workers were given defined-benefit pensions because it was assumed that in the future (long after the people setting up the schemes had retired, on their own cushy pensions), growth would continue and an ever-expanding economy would keep passing the wealth on. By 2018, the reality was a £190bn hole in the nation’s pension schemes, and an economy in which the young pay for today’s elderly in the knowledge that there will be no such bounty for their own retirement.
Worse still, the irrational degree market is underwritten by people who don’t necessarily take any direct benefit from it: taxpayers, who cover student debt at the cost of more than £7bn a year.
For any government, addressing the supply of (financially) worthless degrees is tricky. Even if it means a big chunk of the population escapes long-term reduced earnings and debt, no politician would want to be seen as having reimposed the old system of class division and low social mobility, in which only a privileged few went to university.
Adjusting the structure of fees and loans might make it possible to keep university equally affordable at the point of use, but more expensive in the long term for those that will benefit the most from it. If student finance can be means-tested in the present, why not in the future?
It might look unfair or unproductive if doctors are saddled with more debt than sociologists. But inequality is bad for GDP; as far as the wider economy is concerned, there’s a lot to be said for giving the graduates likely to end up on lower incomes more spending power in later life, and giving the taxpayer less sub-prime student debt to support (economists being more likely to pay off their student loans that poets).
Such an approach would still be unfair to some – what about the economics grads who become librarians? – and would need to be carefully regulated to prevent the very best universities charging an absolute fortune (as happens in the US, where a Harvard education costs more than $200,000). It might also lead other universities to offer an even greater quantity of cheaply delivered degrees at cheaper prices. No one wants an economy in which a handful of doctors subsidise a nation of experts in esports, pastry and golf.
Another approach would be to address the irrational demand for degrees, with information. The government is becoming more aggressive in policing quality, but attending a “bronze” standard university might still sound like a good (financial) idea. There could instead be a requirement that before a university can sell a degree, they have to provide the prospective student with an assessment – based on who they are, what they plan to study and where – of its likely impact on their finances. If it’s going to make them poorer for decades, as many do, they need to know; as the minister pointed out, many financial instruments are sold with more information. Not to offer such a service to 18-year-olds who are about to make one of the biggest financial decisions of their lives looks like a dereliction of duty.
[See also: The new dotcom crash: collapsing ad markets threaten disaster for Big Tech]
Content from our partners
Related
