Tuition fees: what it actually means for the personal finances

Today, the coalition government passed an Act to reform university funding.  While the news are obsessed with the disarray among the Liberal Democrats, I would urge people to look at the darker, wider picture of the widening generation divide.  I think it time that young people face the fact that this reform is popular, even if you hate it.  If anything, what happened today was a success for democracy - the majority won.  The older generation expect you to pay for what they got for free.

If you don't actually know what the deal was, I suggest you read David Willets' announcement of the reform.  The defining argument for the reforms is that students should pay for their university education, since they are the ones who benefit in higher salaries.  Let's analyse the figures for this.  Channel4's FactCheck blog makes the best analysis of the figures.  The best data available suggests that graduates will earn on average £100,000 to £140,000 more than their non-graduate school friends.  The problem of course, as the FactCheck blog admits, is that the best data is not particularly reliable.  Add in huge increases in student numbers in the last 10 years, the effect of the recession, then factor in the cost of the degree (which is excluded from the £100,000 figure), then the cost of servicing the debt, the figure of £100,000 bonus for a degree starts to become questionable.

I might add that this is an average figure where there are winners and losers.  From the scant data available (I have asked Google, and all I can find are secondary sources), it is very hard to determine the financial value of a degree.  Remember that the pupil premium is almost certainly a mean average, where few individuals with really big salaries (CEOs etc) can skew the figure upwards beyond the median average (the more useful figure when it comes to how much you can expect to earn).  

There is a further problem with using the graduate premium as way to put a financial value on a degree.  If we assume that intelligent school leavers earn more, and intelligent school leavers are more likely to take a degree, we can clearly see that this graduate premium steals the money from the "intelligence premium".  That is to say that the graduate premium is in part due to the fact that graduates are made up of potentially higher earners than non-graduates before they even set foot at their university.

It becomes quite incredible that the graduate premium has been used as the central argument for implementing these reforms in this way.

With that aside, 

Example student

I will now attempt to calculate the cost of a degree.  Let us assume you are taking a 3 year degree.

First, I will calculate the tuition fees:

• £18,000 over 3 years

Living costs:

• £8000 per annum living costs (you'd be lucky to survive on this, especially in London)
• over 3 years: £24,000

To fund your living, let's assume that your parents are willing to pay some of your expenses.  For the rest you will take out a student loan.

• parents give you £10,000! (yay)
• £14,000 student loan over 3 years :-(

So you have two debt obligations:

• Student loan of £14,000, with interest rising at the rate of the Retail Prices Index (this has historically been higher than the CPI, which is inflation to anyone who doesn't have a house), to be paid when you are earning over £15,000.  You have to pay 9% of your salary above the £15,000 threshold (see the example later).
• Tuition fees of £18,000, with interest accruing at RPI.  You only need to pay it back when your salary is above £21,000.  There is a further "tapered" interest if you are earning over £21,000 to a maximum of 3% if you earn more than £41,000.  Bizarrely, you can't just repay your loan early, because they want you to pay for interest.  There will be a 5% levy if you try to pay back more than £3000 at a time.

Congratulations, because you are very bright you get a first class degree.  You are lucky to get a job straight away when you leave university (don't count on it).  Your salary?  Let's assume that it's the median value for a graduate with a first class degree, which was £17,000 in 2005, so with inflation we assume the figure for 2010 to be £19,000.  Also, let us assume that your salary increases year on year by £1000 + inflation, because you're so goddam good.  In the following calculation, I will ignore inflation, even though RPI is higher than inflation to anyone without a house.  If you are wise, you will look to reduce your tuition fee debt sooner than your student loans, as the tapering interest rate will start to hit you.  The repayment schedule might go like this:

• year 1 after graduation: £19,000 salary, repay £1000 student loan (SL), repay £1000 Tution Fees (TF)  -   £13,000 SL to go, £17,000 TF to go
• y2: £20,000 salary, repay £1000 SL, £2000 TF  -  £12,000 SL to go, £17,000 TF to go
• y3 £21,000 salary, repay £1000 SL, £3000 TF  -  £11,000 SL to go, £14,000 TF to go
• y4 £22,000 salary, repay £1000 SL, £3000 TF - £10,000 SL to go, £11,017 TF to go
• You propose to the love of your life, ring = £1000.  She says yes, your personal wedding commitment (because you're modern) = £4000.  You better save up.
• y5 £23,000 salary, repay £800 SL, £200 TF - £9,200 SL to go, £10,850 TF to go (minimum repayments)
• y6 £24,000 salary, repay £1200 SL, £3000 TF - £8,000 SL to go, £7,890 TF to go
• y7 £25,000 salary, repay £2000 SL, £3000 TF - £7,000 SL to go, £4,940 TF to go
• y8 £26,000 salary, repay £3000 SL, £3000 TF - £4,000 SL to go, £1,970 TF
• y9 £27,000 salary, repay £4000 SL.  £1970 TF  - debt repaid!!

Phew!!  Well done! After 9 years you've paid for your education!  At the age of 31, you can now start saving up for your first mortgage!   Count yourself lucky (in financial terms), in your last 10 years:

• your job was stable, with a steady increase in salary.  (This is certainly not guaranteed.  I have a friend with a good degree from Edinburgh who worked as a hotel concierge and a security guard at ASDA for 3 years [£12k per annum] - he finally got a graduate position and now works for the arms trade.  Another is working at a bookmakers, another is a care worker)
• Your standard of living remained fairly similar.  Your income after tax and repayments ranged between £14,000 and £16,000 per annum.  This is not considered high, and you may not be able to live on this - consider extending your repayments well into your thirties if you desire a higher standard of living in your twenties.
• your university charged only £6000 in tuition fees.  £9000 is the maximum under these proposals, which would take another 2 or 3 years to pay back.
• no one in your family died
• you didn't have a child to look after and pay for
• you didn't have to live in London
• you didn't get divorced
• you didn't take out a mortgage
• you didn't get seriously ill

The example just given was the best case scenario for a lucky individual.  Life just doesn't go as well or as smoothly as this.

What does it mean for society

University education used to be funded on the principle that a well educated population was good for society, therefore society would pay through the income tax system.  What this reform amounts to is the shift of values to the principle that university education is good for the student alone, therefore the student will pay for his/her education.  It is a right wing vision, and one should expect these values to be passed down to the younger generation.  This has big implications for the older generation too.

Expect the following:

• divisions among the younger generation between those who have wealthy parents ("old moneys"), and those who do not ("no moneys")
• "no moneys" living with their parents into their thirties (it's already happening)
• reduction in house prices as the "no moneys" delay buying.  "Old moneys" will have help from parents.
• longer periods of rent taking more money away from the "no moneys" and into the pockets of the "old moneys" and their parents
• less provision for the retired and elderly (the right wing argument would be "you should have saved for it")
• open learning and part time courses, maybe even "virtual" universities with a community of learners.

There's been talk of a widening rift between the younger generation and the older.  I haven't seen many real life examples until today.  Today was a disaster for relations between the young and old generations.  It will take 15 years for the young to realise the full meaning of this act, and those without wealthy parents will have the most bitter experience.  It does amaze me how little our elders are willing to pay for their youth's university education regardless of the state of our short term public finances; this is a long term reform.  David Cameron is saying that we shouldn't be passing on the public debt to the next generation.  So it is a surprise that part of the solution is for our student youth to take on a hefty private debt, on a weak promise that they will benefit from it.

By my calculations, there's a big chance that students will feel lied to if they believe that they will benefit from university financially.  My friends and I graduated in 2007 believing that, and we feel lied to - and we have half the debt that tomorrow's students will have to take on!  I will warn anyone considering university now: if you want to go to university, make sure it's not because you want more income.  There can be a beautiful experience to be had, but there is a cost that could take more than a decade to settle.