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Is University Worth It?

Mortarboards in the air

A number of parents have asked me recently for a frank answer about whether it is worth their offspring attending university; the eye-watering figures for the total cost quoted in the media are certainly sufficient to give one pause for thought.

For those without the appetite for the financial detail below, the answer is ‘yes’, at least for the majority of students. If you are in numerate mood and feeling calm then read on…

The next bit explains the current system which is for students starting university courses this autumn (2022/23). The last section explains the recently announced changes which will affect students beginning courses in 2023/24.

Here we go. The tuition fees of up to £9,250 per year do not need to be paid in advance. Instead, the fees are treated as a loan to be repaid through a direct deduction from salary at a level of 9% for any earnings above £27,295 (after the deduction of pension contributions but without the benefit of tax relief). Students can also borrow more money to cover living expenses although the maximum amount that can be borrowed is dependent upon parental income. Repayments continue until the debt is discharged or written off after 30 years. This table shows the repayments for different levels of earnings:

Earnings Annual repayment Monthly repayment
£25,000 Nothing Nothing
£30,000 £243 £20
£40,000 £1,143 £95
£50,000 £2,043 £170

Now for the detail. Interest is charged on the loan at a rate of 3% plus inflation (RPI not the lower CPI for those with an eye for economic detail) until graduation after which, in a fit of complexity, the rate of interest depends upon the graduate’s salary with (predictably) higher salaries attracting higher interest rates. (The motivation for this variable interest rate is clear although higher earners will of course already be paying more in tax.) The interest is also charged from the moment the student receives the loan and not from when repayments begin. The interest is compound so that it is added each year to the amount borrowed and this new figure becomes the basis of the interest charge for the following year. Even if the graduate does not earn the minimum salary for repayments the loan continues to grow through the interest being added. This all seems unfair to me as not only are students being charged for their education (perhaps acceptable and probably necessary) but they must also pay interest at a rate well above inflation when the base rate is only 0.5%!

On the other hand, for many students, the loan sum quickly grows to such a large figure that they will never repay it, making the (high) interest rate irrelevant! The key thing to bear in mind is not the total debt but the level of monthly repayment, which bears little relationship to the sum borrowed; experience indicates that this is difficult for many adults, who are familiar with mortgages which must be repaid in totality over a fixed term, to comprehend. For most students the maximum amount that can be borrowed for living expenses is insufficient so that a part-time job or a visit to the Bank of Mum and Dad is necessary.

The detailed arrangements produce some interesting figures for total repayments through a career. Money Saving Expert makes reasonable assumptions about earnings growth and inflation and suggests that you will need a starting salary of at least £55,000 to pay off the loan before the 30 years are up. The website is the best detailed guide to this topic anywhere and is required reading for all parents of Sixth Form students.

Perhaps unsurprisingly, the middle earners will pay back the most. Low earners will never pay back the loan and make very low repayments throughout their working lives; high earners repay the loan quickly enough that they avoid some of the interest charge. Some parents may be tempted to pay the tuition fees up-front. This is almost always a mistake as it requires parents to take the risk that an 18 year old will definitely succeed in obtaining a well-paid job 3 years later. Equally, there is an option to repay the loan early; this may be attractive for parents who find that their offspring have indeed landed a secure, well-paid job and wish to spare them the interest on the loan. There is little point in repaying early for low paid graduates who will never need to repay; parents with high earning offspring might feel that their sons or daughters could address their own financial issues and instead spend the cash on a wildly extravagant round-the-world tour for themselves.

To set against these figures is the graduate premium – the extra earnings likely to accrue to someone who has endured or enjoyed 3 more years of study at university before starting work. A recent survey (pdf) suggests a boost of 10% to earnings at the age of 26, after accounting for the tuition fee repayments and extra taxes, although it depends critically upon the class of degree achieved. Undergraduates should note that failing to work hard and achieve a 2:1 or a 1st is likely to result in the investment of time and money being in vain; the class of degree seems to make more difference to the graduate premium than the institution attended or the subject studied.

The government has recently announced some changes for those students starting courses in 2023/24. This makes things a bit more expensive but doesn’t change the overall picture above. The main changes are:

  • From 2023/24 the total repayment period is extended from 30 to 40 years. The majority of lower and mid-earners will pay for another 10 years increasing the total cost. Higher earners are less affected as they will repay their loan before the 30 years.
  • From 2023/24 the annual repayment threshold reduces from £27,295 to £25,000 until at least 2026/27. This means that most people will start paying sooner and will repay more each year. In some ways this benefits higher earners as by paying more they will clear the loan sooner and therefore pay less interest.
  • From 2023/24 the interest rate will be cut to RPI inflation. This benefits higher earners as they will have to repay less interest; lower earners see no benefit as they will never repay their loan anyway.

Of course, answering my title question is about much more than money; opportunities for personal growth, learning for its own sake, steps towards independence and networking opportunities are all important and offer other ways to answer this question.