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Financial benefits of a degree and the impact of variable fees

Summary

A recent report from Universities UK confirmed that there are ‘significant economic benefits’ associated with a degree-level qualification, writes Pearl Mok of the Higher Education Careers Services Unit (HECSU). A summary of these benefits to the individual, as well as the impact of the introduction of variable fees on these benefits, are reported in this article.

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Introduction

Back in 2001, the government reported that graduates’ lifetime earnings would be £400,000 greater than those who ended their full-time education with A-levels [1]. Later estimates have been more conservative, however. According to a 2005 study from the University of Wales Swansea, after taking into account the costs of acquiring a degree (foregone earnings and tuition costs), male graduates can expect to see their lifetime earnings (net of taxes) increased by £141,539 over similar men who finished their education with two or more A-levels [2]. The corresponding figure for women is £157,982.

The large differences between the estimated government’s figure and Swansea’s figures were reportedly due to the former being derived using evidence gathered before much of the recent expansion in student numbers and, as such, may not truly reflect the current labour market circumstances facing graduates [2].

With the introduction of variable tuition fees in England and Northern Ireland in 2006, a recent report from Universities UK (UUK) by PricewaterhouseCoopers LLP (PwC) not only examines the financial benefits of a degree, but also looks at the impact of fees on the economic returns to an individual [3]. The report draws on research by PwC, as well as evidence from other reports.

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Economic benefits of a degree to the individual

According to the UUK report, the gross additional lifetime earnings for individuals with an undergraduate qualification is approximately £160,000, or between 20 and 25% more, than for those with two or more A-levels (see footnote). In addition, the possession of a postgraduate degree will add another £70,000 - £80,000 to the former figure.

There are, unsurprisingly, significant variations in the additional gross lifetime earnings by degree subject - ranging from £340,000 for medicine and dentistry to less than £35,000 for subjects affiliated to the arts (see Table 1).

Table 1. Gross additional lifetime earnings (wage premiums) by degree subject compared to two or more GCE A-levels (pooled Labour Force Survey 2000-2005)
Medicine£340,315
Engineering£243,730
Maths/Computer sciences£241,749
Physical/Environmental science£237,935
Architecture£195,297
Business and finance£184,694
Social sciences£169,267
Subjects allied to medicine£166,017
Average degree£160,061
Library and information studies£130,021
Technology£119,484
Education£114,935
Biosciences£111,269
European languages£96,281
Other languages£92,346
Agricultural sciences£81,935
Linguistics£71,920
Humanities£51,549
Arts£34,494
Source: PricewaterhouseCoopers LLP (2006), as reported in The Economic Benefits of a Degree, UUK, 2007.

Irrespective of the subject of study, the financial benefit of completing a degree is found to be much greater for women than for men, which could be attributed to the relatively low earnings of non-graduate women. In addition, citing the analysis by Dearden et al (2005), the UUK study reported that whilst the average earnings premium associated with higher education qualifications for all men is approximately 15%, the earnings premium for men from lower socio-economic groups was approximately 19-20% (compared to 9-14% for men from higher socio-economic groups). Women with higher education qualifications, however, appeared to earn the same premium irrespective of family income and socio-economic grouping.

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Returns to a degree

The figures (earnings premium) reported in the previous section have not incorporated any of the costs into the analysis - either direct (e.g. tuition fees) or indirect (e.g. foregone earnings during the period of study). When these costs have been taken into account, ie when the costs incurred by the individual in the short term whilst at university were compared with the enhanced earnings later in life, the average rate of return to all undergraduate degrees was estimated in the region of 12%, says the UUK report. Unlike earnings premium, however, the subjects with the highest rates of return were not those with the highest economic benefits (medicine and dentistry), but those subjects with the lowest costs relative to benefits (see Table 2).

Table 2. Individual rates of return associated with different degree level subjects (pooled Labour Force Survey 2000-2005)
Law17.2%
Management16.9%
Engineering15.5%
Chemistry15.0%
Physics14.9%
European languages14.0%
All degrees12.1%
Medicine (excluding dentistry)11.6%
Chemical sciences10.2%
Psychology10.1%
Linguistics/English literature/Celtic studies9.7%
History8.8%
Source: PricewaterhouseCoopers LLP (2005) The Economic Benefits to Higher Education Qualifications, a report for the Royal Society of Chemistry.

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Impact of variable fees

According to recent figures released by the Universities and Colleges Admissions Service (UCAS), the number of people applying to full-time undergraduate courses at UK universities and colleges by 15 January 2007 has increased by 6.4% compared with the same time a year ago - a reversal of the year-on-year dip in the number of applicants (by 3%) in 2006 [4] [5]. The latest application level is, in fact, higher than the previous record for 2005 entry, when there was a surge in applicants prior to the introduction of variable fees in 2006 [4].

The latest UCAS figures suggest that many students have not been deterred from going to university by the introduction of variable fees, and the overall upward trend in undergraduate course applications is continuing. This is further supported by evidence from another recent UUK study which revealed that in 2006/07, there was no evidence of a link between the change in the level of applications for full-time undergraduate places by institution and the relative generosity of their proposed student support arrangements [6].

According to the UUK report on the economic benefits of a degree, the rate of return to the individual would be expected to rise from 12.1% to 13.2% following changes to the student finance package arising from the introduction of variable tuition fees [3]. The reasons for this are due to:

  • The removal of the need to pay for fees up front (as was previously the case).
  • The re-introduction of maintenance grants for the poorest students and the provision of bursaries.
  • An increase in the threshold for loan repayments (from £10,000 to £15,000).
  • An increase in the interest rate subsidy associated with the maintenance and tuition fee loans.

In short, it is believed that the benefits resulting from these policy changes will currently outweigh the additional repayments that will be incurred later in the working life of graduates.

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Non-financial benefits

In addition to the financial benefits, there are many non-monetary benefits associated with a university education, including the enhancement of career opportunities and employability: graduates are more likely to be employed compared with those with the next highest qualification and are more likely to return to employment following periods in unemployment or economic inactivity [3]. A summary of the non-financial benefits can be found in the Autumn 2005 issue of Graduate Market Trends [7].

The Centre for Research on the Wider Benefits of Learning was established by the Department for Education and Skills in 1999 to investigate the benefits gained from learning across the life course, focusing on the well-being and quality of life of individuals, their families and communities across local, national and international areas, rather than the immediately economic outcomes such as wages. More about their work can be found at the Centre for Research on the Wider Benefits of Learning.

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Footnote

The evidence presented in the UUK report took into account the differences in an individual’s personal characteristics, to ensure that ‘the estimates of enhanced earnings and employment effects are specifically a result of the qualifications and not just the personal and job characteristics of the individuals in possession of those qualifications.’

References

1. ‘Elitism Never Made a Nation Rich’, Margaret Hodge, The Guardian, 6 November 2001.

2. The Return to a University Education in Great Britain, Nigel C O’Leary and Peter J Sloane, Department of Economics, University of Wales Swansea, 2005.

3. The Economic Benefits of a Degree, PricewaterhouseCoopers LLP (in association with London Economics) for UUK, February 2007. The report and press release can be downloaded from .

4. ‘University and college applicants up 6.4% for 2007’, press release, 14 February 2007.

5. ‘Final figures for 2006 entry’, UCAS press release, 18 January 2007.

6. Variable Tuition Fees in England: assessing their impact on students and higher education institutions, Brian Ramsden and Nigel Brown for UUK, February 2007. The report and press release can be downloaded from .

7. Beyond the financial benefits of a degree, Mark Wilberforce, Graduate Market Trends, Autumn 2005.

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