Too many students take courses that don’t benefit them or the economy

In May the government published a comprehensive report into the funding and organisation of post-18 education. Led by Philip Augar, it was the culmination of long and detailed analysis and consultation. Some of its main proposals focused on the need to increase funding for technical and vocational education. It was symptomatic of the problem it was setting out to address that most of the press coverage ignored that part of the report and majored on proposed changes to university funding.

We’ll come back to the non-university bit. The key propositions on university funding went like this: “There is a misalignment at the margin between England’s otherwise outstanding system of higher education and the country’s economic requirements. A 20-year market in lightly regulated higher education has greatly expanded the number of skilled graduates bringing considerable social and economic benefits and wider participation for students from lower socioeconomic groups. However, for a small but significant minority of degree students doing certain courses at certain institutions, the university experience leads to disappointment. We make recommendations intended to encourage universities to bear down on low-value degrees and to incentivise them to increase the provision of courses better aligned with the economy’s needs.”

To put it crudely, universities have a big financial incentive to get as many bums on seats as they can — they get £9,250 per student per year for doing so, almost no questions asked. Students themselves don’t face an up-front cost, at least in terms of fees. And if they don’t end up earning much, even the long-term cost to them is limited by the way the loan repayment system works. The large majority won’t come close to paying off their student loans and low earners will pay back very little. The result is that the general taxpayer remains on the hook for about half the cost of undergraduate education.

The basic incentive problem is clear enough. Universities don’t bear the cost of failure. They get paid irrespective of the economic value of the education they provide. At the same time, graduates are insured against bad outcomes.

Analysis of data on degree courses and graduate earnings, published this weekend by my colleagues at the Institute for Fiscal Studies, provides more evidence on the extent to which this might be a real problem.

First the good news. Even after taking account of the fact that those who go on to university are, on average, better qualified than those who don’t, doing a degree on average adds significantly to earnings over a lifetime. Male graduates can expect to earn about £240,000 more and females about £140,000 more than if they hadn’t gone to university. Once student loan repayments and extra taxes are taken into account, this translates to lifetime benefits of about £130,000 for men and £100,000 for women. The higher earnings of graduates also means that, despite the considerable up-front costs, sending about half of young people to university is a good deal overall for the taxpayer. On average, the additional tax paid as a result of these higher earnings more than pays for the cost of delivering an undergraduate education.

The difference a degree makes, however, varies enormously between graduates. A minority, maybe 3 per cent, will make an extra £500,000 or more during their lifetime. A typical student can expect to gain about £70,000 from their degree. At the bottom, though, one in five students, about 70,000 every year, is likely to lose money as a result of going to university. For most of this group, this is because they will actually earn less than if they hadn’t gone to university. For others, student loan repayments combined with extra taxes outweigh the increase in earnings they enjoy.

One thing that really matters in determining whether, and how much, you gain in terms of income from going to university is choice of subject. Those studying the likes of medicine, economics, law, maths, business and engineering do well on average. Those studying creative arts, things like graphic design and drama, end up making losses on average relative to what they might have earned if they hadn’t gone to university at all.

There are twice as many creative arts students at English universities as there are engineering students. On average, each student of the creative arts ends up earning rather little and costs the taxpayer a considerable sum. On average, each student of engineering earns rather more and benefits the taxpayer. I could keep throwing around statistics like this. The question is, what to do about it?

It is, of course, perfectly reasonable to argue that a university education is good in itself or that it has much wider social benefits than can be measured in purely financial terms. But such truths hardly render these findings irrelevant. Governments need to make choices over how they spend their limited resources. The economy needs people with the skills and education required to maintain prosperity and young people themselves need routes through education into decent, well-paid, secure employment. And the truth is we do not have an education and training system that provides those routes into good employment for enough young people.

Which takes me back to the start. The key finding of the Augar review was that we need to get much better at providing technical and vocational education for a much wider group of young people and that we need good and effective alternatives to the traditional university route. While decent alternatives to university remain too few and too hard to access, too many school leavers will be funnelled into higher education courses that leave them disappointed, the economy poorer and the taxpayer out of pocket.

This article originally appeared in The Times and is used here with kind permission.