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Is University Worth It?

A number of parents have asked me recently for a frank answer about whether it is worth their offspring attending university; the eye-watering figures for the total cost quoted in the media are certainly sufficient to give one pause for thought.  For those without the appetite for the financial detail below, the answer is ‘yes’ at least for the majority of students.  If you are in numerate mood and feeling calm then read on …

 
A few facts are perhaps helpful.  The tuition fees of up to £9000 per year, or £27000 for a typical 3 year degree, do not need to be paid in advance.  Instead, the fees are treated as a loan to be repaid through a direct deduction from salary at a level of 9% for any earnings above £21000 after the deduction of pension contributions (but without the benefit of tax relief).  (The £21,000 threshold is scheduled to rise with average earnings.)  Students can also borrow more money to cover living expenses although the maximum amount that can be borrowed is dependent upon parental income.  Repayments continue until the debt is discharged or written off after 30 years.  This table shows the repayments for different levels of earnings:
 

Earnings Annual repayment Monthly repayment
£21,000 Nothing Nothing
£22,000 £90 £7.50
£30,000 £810 £67.50
£40,000 £1,710 £142.50
£50,000 £2,610 £217.50








Now for the detail.  Interest is charged on the loan at a rate of 3% plus inflation (RPI not the lower CPI for those with an eye for economic detail) until graduation after which, in a fit of complexity, the rate of interest depends upon the graduate’s salary with (predictably) higher salaries attracting higher interest rates.  (The motivation for this variable interest rate is clear although higher earners will of course already be paying more in tax.)  The interest is also charged from the moment the student receives the loan and not from when repayments begin.  The interest is compound so that it is added each year to the amount borrowed and this new figure becomes the basis of the interest charge for the following year.  Even if the graduate does not earn the minimum salary for repayments the loan continues to grow through the interest being added.  This all seems unfair to me as not only are students being charged for their education (perhaps acceptable and probably necessary) but they must also pay interest at a rate well above inflation when the base rate is only 0.5%!  On the other hand, for many students, the loan sum quickly grows to such a large figure that they will never repay it, making the (high) interest rate irrelevant!  The key thing to bear in mind is not the total debt but the level of monthly repayment, which bears little relationship to the sum borrowed; experience indicates that this is difficult for many adults, who are familiar with mortgages which must be repaid in totality over a fixed term, to comprehend.  For most students the maximum amount that can be borrowed for living expenses is insufficient so that a part-time job or a visit to the Bank of Mum and Dad is necessary. 
 
The detailed arrangements produce some interesting figures for total repayments through a career as I illustrate below, making hopefully reasonable assumptions about earnings growth and about inflation.  The figures are taken directly from the website http://www.moneysavingexpert.com/students/student-loans-tuition-fees-changes which is the best detailed guide to this topic anywhere and is required reading for all parents of Sixth Form students.  The figures were produced in 2012 but the conclusions are unlikely to have changed.
 

How much will you repay? (2012 starters)
Borrowing £9,000 for fees & £5,500 living costs per year, for 3 years, so £43,500 in total
Assume 3% inflation and graduate earnings growing at inflation + 2% per year
Starting Salary
(Sep 2015)
Salary in 30 years Total amount repaid Will I fully repay it?
£10,000 £41,000 Nothing No
£15,000 £62,000 Nothing No
£20,000 £82,000 £14,000 No
£21,000 £86,000 £20,000 No
£25,000 £103,000 £43,000 No
£30,000 £123,000 £73,000 No
£35,000 £144,000 £103,000 No
£40,000 £165,000 £133,000 No
£45,000 £185,000 £108,000 Yes - 24 years
£50,000 £206,000 £94,000 Yes - 21 years

Perhaps unsuprisingly, the middle earners will pay back the most.  Low earners will never pay back the loan and make very low repayments throughout their working lives; high earners repay the loan quickly enough that they avoid some of the interest charge.  Some parents may be tempted to pay the tuition fees up-front but this is almost always a mistake as it requires parents to take the risk that an 18 year old will definitely succeed in obtaining a well-paid job 3 years later.  Equally there is an option to repay the loan early; this may be attractive for parents who find that their offspring have indeed landed a secure middle earning job and wish to spare them the interest on the loan.  There is little point in repaying early for low paid graduates who will never need to repay; parents with high earning offspring might feel that their sons or daughters could address their own financial issues and instead spend the cash on a wildly extravagant round-the-world tour for themselves. 

Many commentators suspect that so many people will not repay the loans that the system will eventually collapse.  For example, anyone studying in the UK and then moving abroad to work (an increasing trend) may escape the repayments.  The government, of course, has the power to alter these arrangements retrospectively, which doesn’t inspire confidence, as there is nothing to stop the state increasing the interest and contribution rates, lowering the repayment thresholds and extending the 30 year write-off period!
 
To set against these figures is the graduate premium – the extra earnings likely to accrue to someone who has endured or enjoyed 3 more years of study at university before starting work.  A recent survey (click the telegraph link below) sets this at £168,000 for men and £252,000 for women after accounting for the tuition fee repayments and extra taxes although it depends critically upon the class of degree achieved.  Undergraduates should note that failing to work hard and achieve a 2:1 or a 1st is likely to result in the investment of time and money being in vain; perhaps surprisingly the class of degree seems to make more difference to the graduate premium than the institution attended or the subject studied.  The intriguingly larger figure for women appears to be a function of the much greater polarisation of employment in the female work force between low skill, low pay non-graduate jobs and high pay, high skill graduate jobs; I realise of course that I am well outside my ‘comfort zone’ in seeking to understand such a striking socio-economic discrepancy!
 
http://www.telegraph.co.uk/education/universityeducation/10246785/Graduate-premium-no-matter-what-you-study.html
 
Of course answering my title question is about much more than money; opportunities for personal growth, learning for its own sake, steps towards independence and networking opportunities are all important and offer other ways to answer this question. 

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