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For many young adults, earning a university degree is a perceived necessity for creating a financially stable life. Completing additional education is a stepping stone to increased earnings over the lifetime of a student.

A recent report highlights this earnings potential, stating that the average wage after earning a degree among the UK’s working population is £34,000. This is £10,000 higher than the average salary for those who did not attend university. The difference in earnings compounds each year, leading many to believe time spent at university – and the price paid for attending – is well worth the cost.

However, the increasing expense of earning a degree may outweigh potential earnings over time. Many students are ending their university years with a significant amount of debt. Taking a look at the cost of university and comparing it to the value of higher education is becoming more necessary for young adults who are embarking on the next chapter of their lives.

What’s the Average Cost of Higher Education in the UK?

The cost of attending university in the UK has slowly risen over the last several years, due in part to tuition fees. Recently, per annum fees were capped at £9,250, helping limit the fear of increased costs for new students entering university. However, students also cover living expenses while at school which averages just over £5,000 each year. Combining these necessary expenses for a three-year university program UK students leave university with £50,000 in debt on average.

‘the interest rate is either 1.75% or the UK Retail Price Index (RPI) plus 3%, which currently totals 6.3% total’

Adding to the burden of borrowing for one’s education, student loans in the UK carry interest like any other loan. Depending on the type of repayment plan, the interest rate is either 1.75% or the UK Retail Price Index (RPI) plus 3%, which currently totals 6.3% total. The interest begins accruing on student loans as soon as funds are dispersed. The rates may also change because they are variable.

Compared to the student loan market in the United States (where’s it’s viewed as a controversial financial and political problem), UK borrowers have a higher average of debt upon graduation.

The average student loan debt in the US is just below $30,000, which equates to £23,706. In terms of interest rates, US student loans are less expensive. Federal loan rates come in at 5.05% for undergraduate borrowers, and graduate students see interest rates of 6.60%.

Furthermore, private student loan interest rates typically range from roughly 3.99% to over 14%. In short, loans are generally more expensive in the UK.

Weighing the Cost Against Salary

A significant reasoning behind attending university is to achieve greater earning potential over a lifetime. This should justify the high cost of earning a degree, but many graduates may not see the full benefits of their time at university. Across the UK, the average salary for a recent graduate ranges significantly depending on the degree program. Here are a few examples:

Medicine and dentistry graduates average £46,700
Economics graduates average £40,000
Creative arts graduates average £20,100
Communications graduates average £22,300

For students graduating with £50,000 in debt, earning a low to mid-range salary may not comfortably cover repayment.

‘earning a low to mid-range salary may not comfortably cover repayment’

However, many students graduating with UK student loans enter into repayment plans based on income. Under Plan 1, graduates begin repayment once earnings exceed £18,953 per year; Plan 2 loans require repayment once a graduate earns more than £25,725 per year. The repayment amount is set at 9% of earnings.
Many students do not earn enough out of the university to begin repayment on their loans, but fortunately, no payments are required if income does not meet a certain level. It is estimated that 1.9 million student loan borrowers are not making payments because they do not meet income minimums.

‘is the UK student loan system a reasonable investment for the UK tax payer?’

While payments are not being made, interest still accrues. If interest adds a considerable amount to the balance before repayment starts in earnest, student debtors may find themselves making indefinite payments without making headway on the principal balance for quite some time. This can significantly drive the cost of the loan, and thus higher education.

Notably, any remaining loan balance remaining after 30 years is forgiven which sounds like a good deal for the student loan borrower. This begs another pertinent question: is the UK student loan system a reasonable investment for the UK tax payer? How large are forgiven balances going to be 30 years from now? Who bears the final burdern for forgiven student loan debt.

Conclusion

For students leaving university to pursue their chosen career path, the burden of student loan debt can seem overwhelming.

Starting salaries for graduates may remain low, and many do not earn enough to begin repayment immediately. This could lead to a much larger loan when repayment does happen to start, leaving the borrower to make payments for decades.

Additionally, the loan may not be paid off through income-capped payments over 30 years. The government may have a substantial bill to write off if graduates do not earn enough to repay their student loan balances after three decades. This could have a negative impact on taxpayers in the UK.

However, university graduates are still in a better position to earn more over a lifetime than their non-university counterparts.

The silver lining is greater earning potential starting from graduation may lead to much higher income down the road, making the cost of higher education potentially worthwhile.

In short, it becomes less of a problem if borrowers are able to make much more money in the future – albeit this varies case-by-case.

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Andrew Rombach

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Is higher education a worthwhile investment?