Student debt does not outweigh the graduate premium

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A report by the Intergenerational Foundation (IF), The Graduate Premium: manna, myth or plain mis-selling? has made quite a splash in the mainstream press. It featured heavily this week for ITV, BBC, The Independent, City AM, and The Telegraph. Consequently, it deserves scrutiny.

As the title suggests, the report looked at the graduate premium estimates and attacks the use of a headline graduate premium figure by politicians to justify increases in student fees, interest rates on loans, or adjusting student loan repayment thresholds. Such attempts should, according to the IF, “be challenged for gross mis-selling”. While there are many justifiable reasons to be concerned about the current state of the student loans system, the IF paper fails to get the basics correct in its analysis, and consequently has created some new red herrings in the fees debate.

The report attacks the use of graduate premium figures by both past and present governments, arguing that headline figures cited are problematic and that the “average graduate premium figure is impossible to quantify”. Nonetheless, the report and the press coverage of it hones in on the report’s estimate that the graduate earnings premium is now “around the £100,000 mark” over a working career. The report’s warning is that this will be wiped out by taxes: “£100,000 spread over a 45 year career is worth only £2,222 per year, before taxes and National Insurance which is not high enough to cover even the interest that will accrue on the average loan – hardly a sound financial justification for taking on the debt.” But where does the IF’s £100k figure come from?

The £100k figure is not based on any new research by IF. Instead, the report boldly asserts that £100k comes from the latest government research. One 2013 report cited put the graduate premium at £168,000 for men and £252,000 for women, while an earlier 2011 report concluded that it was £121,000 for men £82,000 for women.

Setting aside the fact that averaging these two would give estimates of £144.5k premium for men and £167k premium for women – far higher than the £100k cited by IF – there is a deeper problem. Both of the cited research papers made their graduate premium estimates net of tax. The 2011 report’s headline figures, of £121k and £82k, are clearly stated to be “net of costs of acquisition and using post tax earnings”. Again, the 2013 report, which estimates £168k and £252k, clearly states that these are ‘lifetime earnings net of tax and loan repayments’. To average those numbers to £100k, and then to say that will be wiped out by national insurance and income tax, is to double count taxation. The Intergenerational Foundation may be against mis-selling but its own report at best misrepresents other research to make its case.

The report is problematic in other ways. A lot is made of the nominal debt which graduates accrue, highlighting that this could hit £282k after 30 years of accumulated interest. Of course, what actually matters for graduates is the burden of repayments. The accumulated interest only affects the wealthiest graduates, who will be the few to pay off their loan debt in its entirety. Interest accruals in an income contingent loans system with a thirty year write-off do not matter to the vast majority of graduates – what is deducted from their salary or bank account does.

The IF report’s failings do demonstrate that we need a better public debate about the possible financial benefits of university study. Even if we believe that higher education is not solely about graduate premiums or employability (and I hope we do not), every prospective student should understand that what you study and where you study will have a huge impact on your subsequent earnings prospects. As the IF report notes, the factors which influence it are varied, including, amongst others, “pre-university education, the institution you attended, socio-economic background, gender, ethnicity, subject choice, and degree result.” Like any other investment, past performance is no guarantee for future results. Courses change, employment markets change shape, recessions hit, and monumental political perturbations like Brexit happen – all things which can affect who earns what after finishing university.

Rather than a single figure, it could be more useful to have ranges of figures, say a median, top quartile, lower quartile figure. Of course, given the complexities noted above, even these numbers would inevitably fail to represent a student’s specific experience and prospects. It is clear though that a mean graduate premium figure for graduates is not a particularly useful number. The IF report has exacerbated this problem, rather than improving it.

IF is not wrong to be critical of the current student loans system. The government has broken a promise by freezing the repayment threshold, even if it was permissible in the small print, and it will hit poor-to-medium income graduates the hardest. The removal of maintenance grants is a disgrace which will leave graduates from low incomes the most indebted and liable to pay more than their wealthier peers.

We need a more intelligent discussion of what the possible financial benefits of university are. But the Intergenerational Foundation report does not make a positive contribution to the debate. Instead, it risks scaring people off going to university on the basis that the average graduate premium of £100k will be wiped out by taxes: this is simply an incorrect use of the figures. Facts and research matter. Wonks must stick to this, even in an era of post-truth politics. We should not sit back and let them be misused, however much many of the government’s HE funding policy deserve criticism.

2 thoughts on “Student debt does not outweigh the graduate premium”

  1. Will Haines B.Sc. Manchester says:

    I am not surprised in the slightest that you have found the report ‘problematic’. What is this sonorously-titled Intergenerational Foundation? A collection of the Great and the Good put together by David Willetts to investigate ‘fairness between the generations’. It would seem that none of them are sufficient alert to spot that their Chairman is the self-proclaimed architect of that most generationally discriminating idea of modern times, the Recent Graduate Tax. Expect nothing worthwhile from them.

    Let us consider for a moment the existence of a skewed universe in which a Graduate Tax, a tax on learning and study, a tax on doctors and nurses, a tax on teachers and lecturers, a freebie for those who earn just as much but without going further than the first 14 years of state-funded education, is somehow acceptable. It would of course be properly revenue-generating to tax all (I mean all) graduates simply by adjusting their tax rates to be 25%, 50% and 60%. I am certain that all non-graduates would recognise this to be remarkable fair and equitable. It would also save the cost of the SLC and all that irrelevant loans window-dressing for the stupid electorate whose only desire was to avoid any personal tax increase (and to stick it to the mythical beer-swilling student who they wished they had been).

    You have been sidetracked into discussing the details of a Very Bad Idea, in order to deflect you from the fundamental issue. Falling prey to the classic politician’s trick is no way to generate a better public debate. I’m also disappointed to come across your continuing references to ‘loans’. Listen to Willetts himself; it’s a tax system, not a loan system, but the politicians thought that they would ‘confuse’ the general public if they tried to clarify things. (That is, of course, devious rubbish.)

    I do expect someone, somewhere, to keep tending the flame for ‘free’ university education. That’s what we graduates expect from paying our income tax. Not that this present bunch of politicians are any recommendation for the British university system. Roll on the time when a significant number of MPs are GT payers. That should bury this Very Bad Idea.

    1. Roger says:

      What is also a “Very Bad Idea” is having 60% of graduates in non-graduate employment – for all of their lives.

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