Money back guaranteed?

November 8, 2002

If top-up fees are adopted, demand for data on what students can expect to earn from their degrees will grow. Chris Bunting reports.

In Thomas Hardy's novel Jude the Obscure , a young Jude talks to an elderly carter about the university of Christminster. The carter, who has never visited the place, nevertheless has a very clear idea of what goes on within its ivory towers: "Five years to turn a lirruping hobble-de-hoy chap into a solemn preaching man with no corrupt passions, they'll do it, if it can be done, and polish un off like the workmen they be, and turn un out wi' a long face, and a long black waistcoat, and a religious collar and hat, same as they used to wear in the scriptures, so that his own mother wouldn't know un sometimesI There 'tis their business like anybody else's."

Over the years, the expectation of what a university education should produce has changed. In the 1850s, Cardinal Newman hoped higher education would turn out gentlemen. Others have looked to the sector to turn out a stiff upper-lipped officer class capable of running an empire or a managerial class for leading the post-war technological revolution. All these definitions share one thing in common: the promise of material and social improvement.

Significantly, Hardy's carter believes the men of Christminster are "able to earn hundreds by thinking out loud. And some on 'em be strong young fellows that can earn a'most as much in silver cups". Government ministers have been saying pretty much the same thing recently, repeating like a mantra that the average graduate can expect to earn about £400,000 more than a non-graduate over a lifetime.

As the burden of financing higher education has been shifting from taxpayers to individual students and their families over the past 15 years, claims of a private financial advantage to attending university have come under detailed scrutiny. From 1988, the phased replacement of local education authority grants with student loans and, ten years later, the introduction of tuition fees, both relied on evidence showing large rates of return to individuals who invest in university degrees.

In 1988, the government claimed that the rate of return on a degree - the additional earnings a graduate will accrue with an allowance made for the costs incurred during his or her time in higher education - was about 25 per cent. The Dearing report, which preceded the introduction of tuition fees, brought that estimate down to between 11 and 15 per cent. Last week, a report by the Organisation for Economic Cooperation and Development said the UK had the highest rate of return for higher education among the ten countries studied.

In all countries, the OECD reported, investing in a degree was substantially more profitable than putting your money in government bonds. While the rate of return was only 7 per cent in Italy and Japan and between 10 and 15 per cent in France and the Netherlands, it rose to 17 per cent in the UK.

Ian Walker, professor of economics at the University of Warwick, says:

"There are not many assets you can invest in that yield that rate of return and, unlike other financial investments, this high-yield investment also reduces your uncertainty: you are much less likely to become unemployed if you have a degree.

"There is normally a trade-off between risks and return, but the person who invests in a degree has higher returns and less risks than someone who doesn't," says Walker, who is taking part in a conference on rates of return on education at the London School of Economics next Friday.

Walker does not see any sign of a slowdown. "Even though there has been a dramatic expansion in higher education over the past 20 years, the rate of return on education has not been forced downwards," he says.

Such evidence has encouraged the tuitions and loans argument and, in recent weeks, has provided a crucial part of the justification for the proposed next step down this road: adding top-up fees for students taking degrees with especially high rates of return.

But while average rates-of-return statistics are relevant to the existing system of uniform tuition fees for all students, proposals for differentiated fees demand evidence of the different financial rewards of attending a particular university or course.

Government performance indicators for universities include a measurement of the number of graduates who find employment after leaving their courses, but this is unlikely to satisfy applicants asked to decide whether to pay differentiated fees, says Jeremy Smith of the University of Warwick.

"Getting employment could mean getting a job that is adequate or it could mean a basic clerical job with very poor prospects. People are going to want to have a much better idea of what the real risks and returns of a degree are," he says.

Some data differentiating courses already exist. A study by Walker last year showed markedly different rewards for different subjects. Economics graduates, for instance, had rates of return running at 35 per cent higher than arts graduates. Analysis of variations in graduate earnings by Smith, Warwick's Robin Naylor and Abigail McKnight of the London School of Economics showed that occupational earnings for a female graduate in law or politics degrees were, on average, 26 per cent higher than the earnings of an otherwise identical social studies graduate.

There is also data available that could provide the basis of comparisons of the relative rewards of universities. Smith et al gained access to the confidential Universities Statistical Record, the former depository for student records of the "old" universities. These records covered the whole cohort of old university graduates and provided detailed information about particular universities attended, subjects of study and degree classes. Between 1991 and 1993, the researchers found that four universities were in the top ten every year in terms of graduate earnings. Two universities were always in the bottom ten. Average earnings of graduates between institutions varied by up to 35 per cent.

"We were given access only after signing confidentiality agreements and we could not identify the universities in our study. I believe that even the government does not have access to these records. A move to something like top-up fees, however, would obviously produce demand for this kind of information from the public," Smith says.

But if sophisticated rates-of-return analysis has the potential for causing discomfort among some academics, it should also provide pause for thought among policy-makers considering the introduction of top-up fees.

All of the rates-of-return experts The THES talked to cautioned against a simplistic interpretation of their figures. Walker, for instance, says the apparently high rate of return for his subject, economics, may reflect the highly financially motivated nature of his students rather than anything in his curriculum. If rates of return are corrected for students' social background and academic success at school, differences between institutions, though still detected, become less marked.

Stephen Machin, professor of economics at University College London, says:

"There are so many factors affecting this beyond the institutions or the subjects. There are differences (depending on) if you are a man or a woman and what time you come through university. Different groups entering the labour market in different conditions will have different patterns of rates of return. We would have to be very careful about making conclusions about the relative worth of particular institutions or courses."

Although women are paid less than men in their first jobs, they often receive a higher rate of return, relative to other women, from their degree. If differential fees are to be justified by the different returns from university courses, should women pay more or less for their courses? If extra fees are justified only by the value added by the degree itself, rather than the student's characteristics, would Oxbridge institutions be prepared to charge less than a red-brick university adding more value to its relatively unprivileged students? (Independent school students earn between 2 and 3 per cent more than state school students after university.) Sophisticated rates-of-return research may even raise doubts in some students' minds about the wisdom of going to university at all. Far from being a risk-free investment, Naylor, Smith and McKnight's study indicates large variations in the rates of return for different classes of degree.

For the average male graduate, the study says the difference in occupational earnings associated with a first-class degree rather than a third class is about 12 per cent. Significantly, there is a greater variation in earnings among students at top universities compared with universities with less attractive average rates of return.

"While the averages may show overall rates of return being very high, the student is taking a risk that they won't achieve a good degree. These averages are being pushed up... by the success of those people getting good degrees. If this kind of information is available to applicants, there is a risk that we would find students from poorer backgrounds with less favourable access to capital being deterred by the greater risks and higher costs of the top universities," Smith says.

But over all this looms a much bigger question, according to Walker. "Why do we go to university? Is it just about financial rates of return or do those English students who don't do as well as my students get some other reward? They may do. I have three brothers who don't have two CSEs to rub between them. Of course, they all earn more than I do. I haven't changed my job."

The Centre for the Economics of Education is holding a conference on rates of return on education on November 15 at the London School of Economics. More details: 0207 955 7285.

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