LEVELLING UP

A Question of Degree

Exploring long-term earnings for higher education leavers, why we should cut graduates’ taxes and pay for it by reducing the number of low value university courses.
Neil O’Brien OBE MP, Will Tanner, Guy Miscampbell
January 7, 2019
A Question of Degree
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"For most people, study is a route to a job, a career, a better income. At the moment too many of those young people are being sold a false promise. Too many are facing hefty repayments for degrees that won’t help them financially, and too few are being offered quality technical and apprenticeship options instead. It’s time to rebalance the system, and create a country in which there are more good options and more ladders to climb up."

Gillian Keegan MP and Neil O’Brien OBE MP

 

The debate about student loans has been focusing on the wrong problem.

The problem is not just the quantity of debt students can accumulate.

Nor is it just the high interest rate applied to student loans, which takes full repayment further out of reach for most graduates.

The real problem is that many graduates never earn enough to pay back these loans and those that do are taxed at rates unacceptable elsewhere in the labour market.

As this paper outlines, a tenth of current undergraduates will earn less than £25,000 a decade after they graduate. They will not be paying off any of their loans, even ten years after leaving. A total of 83 percent of student loans will now never be paid back in full. At the same time, those graduates that are paying back their loans can face a marginal tax rate of up to 51 pence in the pound.

This is an uncomfortable truth for policymakers who argue that current student loans are justified by the benefit to graduates’ earnings potential.

For many at university, and many who have already graduated, university is simply not going to be worth it economically – either for students saddled with debt they cannot pay off, or taxpayers who end up paying it instead. Indeed, nearly one in five graduates are no better off after five years than if they had chosen to do an apprenticeship instead. In this report, we analyse the official DfE data on long-term outcomes for higher education. We find that:

  • Between 18 and 25 per cent of graduates are studying degrees which fail to deliver a lifetime earnings premium that justifies the £50,000 cost of a student loan.
  • In 2015-16, 40 per cent of graduates were enrolled in courses which led to median earnings of less than the student loan repayment threshold of £25,000 after five years.
  • 10 per cent of students were enrolled in courses with median earnings of less than £25,000 ten years after they have graduated. This represents 134,000 students each year who won’t be paying back anything even ten years after they leave university, yet will have accumulated significant interest.
  • 1 in 5 graduates are no better off five years after graduating than if they had chosen to do a non-university route, such as an apprenticeship instead, when foregone earnings and apprenticeship premium is taken into account.

According to exclusive polling for the report, 44% of people believe that “there are too many students going to university”, compared to just 25% who believe there are not enough. The number who believe there are too many student places rises to 47% of those with a Bachelor’s degree, suggesting that those who go to university do not feel they receive the benefits of doing so.

Nov 16
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Problems with how we fund higher education

Recommendations

  1. Graduates face high marginal tax rates of up to 51 per cent for those on the higher rate, and a 41 per cent rate for those earning over £25,000.
  2. Many expensive university courses see their graduates with low earnings afterwards.
  3. Technical education is already a better route for many students, despite political neglect. But technical education is underfunded and graduate-level technical education is very limited at present.
  4. Accounting for higher education loans in the public accounts is opaque, complex and has skewed decision making against technical education, while enabling the expansion of poor value university courses.
  1. Halve repayments by introducing a graduate tax cut, worth 50 pence in every pound of loan repaid.
  2. The graduate tax cut should apply to all student loan repayments, whether paid by past, present or future graduates, thereby treating past, present and future students equally
  3. Protect students and taxpayers by reducing the flow of students into low value university courses.
  4. Divert students into either higher value university courses or graduate level technical education.
  5. Grow higher technical education, re-investing the savings made from reducing low value university courses to support one-for-one investment in higher and graduate-level apprenticeships.
  6. Put technical education on the same footing as university courses in school leavers’ application process with a single portal to apply for both.
  7. In the short term, make university funding more open and transparent, by including a measure of the Resources Accounting and Budgeting (RAB) charge in the ex-measures they publish.
  8. Over a longer period, deliver on the ONS’ review suggesting that the element of the loan that will never be repaid should be treated as an in-year cost.

Problems with how we fund higher education

  1. Graduates face high marginal tax rates of up to 51 per cent for those on the higher rate, and a 41 per cent rate for those earning over £25,000.
  2. Many expensive university courses see their graduates with low earnings afterwards.
  3. Technical education is already a better route for many students, despite political neglect. But technical education is underfunded and graduate-level technical education is very limited at present.
  4. Accounting for higher education loans in the public accounts is opaque, complex and has skewed decision making against technical education, while enabling the expansion of poor value university courses.

Recommendations

  1. Halve repayments by introducing a graduate tax cut, worth 50 pence in every pound of loan repaid.
  2. The graduate tax cut should apply to all student loan repayments, whether paid by past, present or future graduates, thereby treating past, present and future students equally
  3. Protect students and taxpayers by reducing the flow of students into low value university courses.
  4. Divert students into either higher value university courses or graduate level technical education.
  5. Grow higher technical education, re-investing the savings made from reducing low value university courses to support one-for-one investment in higher and graduate-level apprenticeships.
  6. Put technical education on the same footing as university courses in school leavers’ application process with a single portal to apply for both.
  7. In the short term, make university funding more open and transparent, by including a measure of the Resources Accounting and Budgeting (RAB) charge in the ex-measures they publish.
  8. Over a longer period, deliver on the ONS’ review suggesting that the element of the loan that will never be repaid should be treated as an in-year cost.

The current system needs to change.

The current political debate is mainly about shifting the economic cost of higher education between the general taxpayer and the individual graduate. This paper looks at how we can reduce the underlying economic cost – which arises because too many people are studying courses with high costs which are not repaid by higher earnings. By reducing the underlying cost we can make the individual graduate and the collective taxpayer better off.

Today we have data on the returns from individual courses – data which didn’t exist when the current system was set up. We can see which courses at which institutions lead to low earnings for their graduates. We now also have new data on the dramatic and accelerating imbalance of wealth between generations. We know that compared to their parents young graduates are dramatically less likely to own their own home, or to have generous defined benefit pensions. We know that a typical adult born during 1981–85 had half as much total net wealth at age 30 as a typical adult at the same age five years before them. The facts have changed – now it’s time for policy to change.

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