With the ever-increasing cost of tuition fees, course materials, living costs and everything else that university life brings, going to university in 2015 just may not be financially worth the cost. We look (in detail) at the financial benefits and disadvantages that a university education brings and attempt to definitively answer the debate: is it worth going to university in 2015?
Please excuse the rambling nature of this article! There are just so many pre-empted ideas and thoughts on this subject that I wanted to take a slightly different approach to writing this article.
I’m simply going to start to write my ideas and thoughts, do research in real time and document in this article how my thoughts change due to the articles I read or data that I analyse. I’ve done this deliberately so that you can work through my train of thought and agree/disagree with me along the way.
There is a lot of detail to come (over 4500 words – not including images), but please bear with me as we attempt to answer the question: is going to University worthwhile in 2015?
Why am I asking myself this question?
When I went to University over 10 years ago, I considered it a “no-brainer” decision, as did my peers, my family and everyone who I knew. My understanding was that those who attend University earned much higher salaries throughout their career and that the investment in the short-term would easily be repaid over my lifetime of higher earnings.
However, over the past few years (and specifically in the past few months), I’ve started to question this generally accepted point of view. Why? Well, this is due to a number of factors:
The ongoing dilemma of student debt
Almost every personal finance website I read – and I do read a lot – have a story about their repayment of their student loans. These range from a few thousand pounds, dollars or euros to hundreds of thousands. People are still paying off these loans in their 30s, 40s, 50s and beyond.
The student loan debt seems to cause them no end of anguish and concern and it usually forms the main part of most peoples’ “debt-free” stories.
My own personal journey
I’ve looked at my personal experience. Before moving to France 2 years ago, I paid the remainder of my student loan off. When I went to University, I worked part-time during term time, full-time during all holidays and spent more time at University earning money through some side hustles. Despite all of this, I still left University with around £9,000 in debt.
Then, it came to paying it back. In the grand scheme of things, I paid off my student loan VERY quickly. This report states that three in four students in the UK will still be paying down their student loans in their 50s. Therefore, to eradicate mine by the age of 27 is ahead of the average.
But, even by paying my student loan down in record time, and paying interest at record low rates (it was 0% in 2010), I still paid over £1,100 interest in the 6 years which I had outstanding student loans.
The rise in tuition fees
I see myself almost as a “best case” scenario here: my University education took me 6 years after I finished University to pay off. This was when the fees chargeable for home students going to University in England was £3,000 per year. In 2015, these will have risen to £9,000 per year. Therefore, the standard undergraduate degree will cost £27,000 alone in tuition fees (not to include the cost of accommodation, food and drink, text books, clubs, etc etc). In 2013, 185,000 graduate students then continued to complete post-graduate studies, which would further increase their fees, living costs, etc.
There are actually a few other things that have got me pondering whether going to University is worthwhile financially, but I’m too eager to get into the numbers so I’m going to move on.
Is it worth going to University in 2015 from a financial standpoint?
The first, and easily most pertinent, part of this question is the financial benefit of attending university. The first part of this equation is the cost of going to University.
Going to University – The Cost
As stated above, tuition fees for a three year undergraduate course are £9,000 per year, amounting to £27,000, for which the average student can take out a loan for this full amount.
Then, we have the cost of living. Another loan is available for £5,555 per year (assuming that you are going to University outside of London). This equates to £463 per month. Is this enough to cover living expenses? Not even nearly.
The NUS considered in a 2010 article that course costs would average £10,133 per year and living costs would account for another £12,056. This has been amended for inflation and broken down into the table below:
Therefore, the annual expenditure of going to university is thought to be in the region of £26,000 per year.
Going to University – The “income”
Amusingly (I’m sure any fellow PF geeks will see why), the NUS site refer to the loans provided to students as income, and hence the laughably inappropriate heading for this section.
So, what loans are available? Well, you can obtain the following:
- £9,000 per year as a tuition fee loan
- £5,555 per year as a maintenance loan
Pleasantly, students can also get a maintenance grant, but this is linked to their household income (i.e. them and their parents). The median household salary in the UK for a family with two adults and two children is currently around £47,000.
When entering this information into the gov.uk site for student information, it informs me that the student in this family going to University would be entitled to a grant of…(drumroll please)… £0.
In fact, the maintenance loan available would also reduce to £5,310 per year.
Therefore, the total annual loans (“income”) that someone going to University in 2015 could obtain would be £14,310. This gives a short-fall of £11,645 for each year of study, totalling £34,935 over the three year course.
Going to University – Filling the gap
I want to make this an equivalent study (between going to University and heading straight into the world of work).
Therefore, I’m going to assume that the parents will pay nothing towards expenses (as they wouldn’t if you went straight into employment) and that we will work the same number of hours when at University than in full time employment.
According to a Guardian report from 2011, the average person in the UK (which we shall use for our working comparisons later on) works 42.7 hours a week, but the average number of paid hours each week sits at only 38.5 hours. With 5.6 weeks’ statutory leave requirement in the UK, this means that the average worker will work 38.5 hrs x 46.4 wks = 1,786 hours per year.
Therefore, to determine how much part-time work we can reasonably expect the equivalent student to do each year, we need to work out the number of hours that they would spend at University in lectures, classes, or doing research/assignments etc.
A study from Times Higher Education reached the following conclusions:
The highest hours per week are 49.8 (equating to 1794 hours per year before studying outside of term time) whereas the shortest is a meagre 15.9 (equating to only 477 hours per year before studying outside of term time). If we assume 50 hours of study outside term time, we would have a high of 1850 and low of 525, with a midpoint between the two of 1187 hours.
The Quality Assurance Agency estimates that 1,200 hours per year in total are required each year to obtain a University Degree.
Given the proximity of these two independent sources, this seems like a reasonable number to use as our assumption.
With an average of 1,200 hours of work, this leave 586 hours of work per year which can be performed by the student to equate to a full time job. Let’s assume that the student worked at the “living wage” of £7.85 per hour, which is above the national minimum wage, whilst they completed their studies. This would equate to an annual additional income of £4,600 per year.
Let’s have a reminder of the equation to date:
|Annual Working Income||£4,600|
|Total annual expenses||£(25,955)|
This gap is proving quite difficult to fill. More often than not, this shortfall will be funded by parents. Therefore, we have two choices when making a comparison to diving straight into work:
- Assume the parents will pay for the annual shortfall, but equally assume that the option of going straight into work also includes a £7,055 contribution from the parents
- Assume that the student has to fill the gap with other loans or credit cards
Both scenarios are fairly realistic, but let’s assume that the parents will pay for the shortfall for our workings (as this is a less damaging result than taking out other loans and generally I would imagine that parents earning a household income would contribute this to their children’s future).
Going to University – The final position
So, after 3 years, the student is coming out of University with £14,310 x 3 = £42,930 of student debt (even after contributions of over £21,165 from their parents). We shall assume that this is the net worth of the student when they leave university. In reality, the net worth position of students leaving university is MUCH worse than this if their parents have not contributed to the shortfall, or if the student lived beyond their means and funded it with credit cards, bank loans, etc etc.
To make a comparison at the exact same time as graduating, let’s work out what the net worth of the average worker would be after the 3 years if they hadn’t gone to University.
The worker – Income
The best place to look here is the national government statistics. The median average income for 18-21 year olds is £13,765 per year. But, wait? Are we average?
This is an interesting question for me, and a HUGE assumption in this comparison. In my scenario, I’m considering the question whether someone with the choice to go to university would be better off going straight into the workforce or whether they would do better going to university.
Therefore, I’m assuming that this individual has sufficiently strong A-level grades to get into university and the educational aptitude to do so.
I would argue, and this may be a point of debate, that this individual is able to earn above the average salary for someone in the 18-21 year age range. But, by how much? Well, I think 10% wouldn’t be a ridiculous assumption. We’ll come back to this point later as it’s a major topic of debate within our comparison.
Therefore, our individual has an estimated gross annual income of £15,142. We will also assume a 2% matched pension from our employer and a 2% annual bonus (both would seem reasonable for a role at this level).
This gives us a net income (after tax) of £13,352 per year.
The worker – Expenses
This worker would have many of the same expenses as the university student, which could be broken down as:
The worker – Net worth
Therefore, after the three years when the worker’s friend is at University, the individual will have £1,032 saved each year from income exceeding expenses. We will assume this is saved at a nominally small interest rate (1%) over the 3 years. This would therefore contribute £3,143 to this individual’s net worth at the end of the 3 years.
Additionally, in their net worth, they will have their 2% pension contribution of £303 each year, which was also matched by their employer. Let’s imagine that this is invested at the FTSE 250 long-term average returns (including dividends) of around 11% per annum. The value of this retirement fund at the end of the three years would therefore be £2,130.
Finally, we also have the parents’ contribution of £7,055 per year to make the two scenarios equivalent. This is invested at the start of each year in a stocks and shares ISA again earning the FTSE 250 long-term returns. This would total £26,172 at the end of the three years.
So, what is the financial position at the point of graduation?
Using the above assumptions, we have quite a contrasting position at the moment of graduation:
So far, I think that my assumptions, if anything, have favoured the university student. For example, I personally think that the average 18 year old who actively chooses work and rejects an offer from a university due to the future financial figures will earn a salary of greater than 10% above the average 18 year old. They will be more driven and have greater aptitude.
Additionally, I’m ignoring the fact that many students will spend a lot more than these figures suggest due to lifestyle. We are assuming a monthly cost of around £100pm for leisure activities. Most of my friends at University (including myself) would have struggled to meet this budget whilst living the University lifestyle!
We are ignoring that 84% of undergraduate students have credit cards and have to pay interest on these whilst at university.
I’m ignoring a huge factor that in 2013, it was estimated that 7% students will fail to finish the course that they started and drop out of University. Depending on when they drop out, they will be in a worse position that both of these groups.
I’m also ignoring post-graduate study which a lot of students go on to do after university.
What happens after graduation?
What happens now? Well, the university graduate has got a lot of wages to catch up on. This is primarily going to be a result of wages.
The ONS recently released the October – December 2013 figures for the median hourly pay for all 22 to 64 year olds by qualification:
So, we can see from this information, that the median hourly wage is indeed significantly higher for those with a degree than those which only have an A-level education.
But, of course, there is a gap between the two. Some people go on to obtain higher education whilst working. I’m sure that the individual that I am considering would have gone into the workforce and continued to educate themselves. Remember, they are only not going to university because they don’t believe that it is financially beneficial.
Therefore, I think the fair comparison would be to take the degree wage and compare it to a wage in between the higher education and A-level rows. Let’s say £15.69 for a degree and £11.00 for our worker.
Again, I would argue that this favours the university student as the £15.69 includes everyone with a degree and you would think that students with post-graduate education would earn more and therefore the average individual with an undergraduate degree would earn less than this figure.
A full study was performed into this as part of the 2011 census in the UK. It released figures by percentile. I’ve just summarized the hourly wage for each 10th percentile into the following table for reference:
Say that we assume our average university graduate is a 50th percentile. Again, would it be fair to assume that our individual who is thinking this decision through (and has the sufficient A level grades to attend university) would equally be in the 50th percentile.
Conclusion? I don’t know.
However, given this data, my assumptions of £15.69 with a degree and £11.00 for our worker don’t seem outrageous, do they?
Annual salaries – degree vs worker
Based on our prior calculations, we said that the average UK worker clocks 1,786 hours of work per year. Based on the assumed calculations, this would give the average 22-64 year old with a degree a salary of £28,022 and the worker an equivalent gross salary of £19,646.
Back to the salary calculator (with the same assumptions as before) and the net salary information is as follows:
|Gross Income(including bonus)||£28,582||£20,042|
|Pension contribution (employer & employee)||£1,020||£786|
|Student loan repayment||£1,050||£0|
|Take Home Pay||£21,211||£16,469|
So, yes, the graduate has a higher take home pay after qualifying. But, will this be enough?
Annual expenses – both
We will simply assume here that both people have the same annual expenses following graduation. Average per person spending as per 2012 was £205.80. Inflation adjusting for 2014 and annualised, this gives us assumed annual expenses of £11,025 per year.
The net worth journey – non graduate
Right then. I’ll start with the non-graduate as it’s a little more straight forward. The following assumptions have been made:
- £5,000 will be kept aside for an emergency fund and no interest will be earned on this amount
- 8% returns shall be earned on the remaining funds (calculated as 11% FTSE 250 returns including dividends but reduced by 3% for inflation each year).
- Income, expenses and pension contribution will all remain constant
The non-graduate worker’s net worth journey will continue from the age of 22 until retirement at 65 as follows:
A nice tasty closing pot (albeit non-inflation adjusted) of £4.2m.
The net worth journey – graduate
Okay. You’ve got £4.2m to beat Mr. Graduate.
Same assumptions to be made, except for:
- The graduate has the required amount detracted from his salary as a student loan repayment.
- The student loans shall charge interest 3%
- After 30 years, the remaining student loan balance is eliminated (this happens in the UK, but may not be the case elsewhere around the world).
Sorry there is so much detail there.
Effectively, we are working out the student loans (only repaying the minimum required) and then investing our surplus over the top of our emergency fund.
I’ll be honest. When I was writing this introduction, I was expecting the University Graduate to come out better off. There must be a reason why everyone thinks like this, mustn’t there?
Then, as I worked through the example, I was starting to think it was going the other way.
So, where am I now? Confused.
My key points here are:
- At the retirement age of 65, the graduate is around £1.0m better off
- It takes the graduate until the age of 36 to catch the non-graduate up
- Both are very well off at the age of 65 due to investing in their pensions and the effect of the 8% compound interest.
It would appear, therefore, that a University education (however expensive it may seem at the time) is currently worth doing financially.
What still bothers me, however, are these assumptions. I’m just not sure about these assumptions. The key assumption is the “percentile” that my non-graduate individual would be classed in.
I’m happy that the individual is a 50th percentile degree qualification if he goes to university (although this may be generous based on post-graduate students in the population) However, is a person who is in the 50th percentile of graduates, but decides not to go to university but rather opt for a career elsewhere really a 50th percentile?
Think about it like this. The graduate in the 50th percentile would reasonably have achieved the 50th percentile of all university entrants. Imagine that this is BBB at A-level. Do you think that the average person obtaining 2 a-levels of any grade (what is required to be classed as “A-level educated”), but not attending university afterwards, obtained grades of BBB? I very much doubt it. In my experience, students who obtain good grades generally go to university. Those who do not, don’t. Therefore, I would put the average grades of someone achieving A-levels, but not going to University as something more like two C grades (or even below).
What is the breakeven for the non-graduate?
I would like to know, therefore, what the non-graduate needs to earn in order to have the same net worth at the age of 65 as the graduate.
From the spreadsheet I used above, I can see via “goal-seek” in Excel that the annual income for the non-graduate would need to be £18,588 instead of £16,469 in order to have £5.2m at the age of 65 in our example.
Working backwards, this means that the non-graduates annual gross salary would need to be £22,700 per year, calculated at £11.33 per hour. Referring back to the 2011 census, someone with ONLY A-level qualification would need to be in percentile 62 to earn this amount.
For those with higher education, the individual would only need to be in percentile 42 in order to earn this amount per hour.
Again, I’m sure that our potential average university degree graduate would be far above both of these levels.
Therefore, this would sway the conclusion heavily towards the fact that University is simply not financially worthwhile in 2015.
Another thought from my past
One very significant thought which led me to perform this comparison was remembering what happened to my brother, or more specifically to his fellow high achiever.
My brother was a truly excellent student. In 1999, he completed his A-levels, and obtained obscenely good grades. I can’t remember exactly, but I think that it was 6 As at A-level (following 11 A*s at GCSE). However, despite his clear academic prowess, he was rejected from Oxbridge.
The Guardian newspaper ran a front page report on Oxbridge not accepting an appropriate number of students from state schools and my brother was the key feature.
Don’t worry. He was fine. He got accepted to Durham University, which he loved.
However, the other student in the article who excelled and was rejected from Oxbridge took a slightly different path. After getting his rejection from Oxbridge, he went to a series of investment banking firms in central London and discussed what was available for him if he didn’t go to University.
Based on these conversations, he then rejected his other University offers and accepted an offer to dive straight into his career in Investment Banking. I’ve not heard from this student since, but I’m fairly sure that he’s doing just as well as he would have been if he decided to go to University. What do you think?
My own story
This makes me wonder long and hard about where I would be without a degree. I’m a chartered accountant and I obtained the ACA qualification after leaving university whilst working for a Big4 accountancy firm. I worked there for 8 years, and now I am self-employed performing consulting engagements and focusing my efforts on making moneystepper.com a success (work in progress!!).
Whilst I could not have ever been employed in my previous role without having a degree, I could still have obtained the ACA qualification. I could still have got an accounting role in industry and learned my trade. I could have still worked hard and impressed my alternative employer with the same qualities that I was able to express at the Big4 firm.
Maybe I would have progressed more quickly with an extra three years’ experience?
Maybe working outside of a rigid promotion environment (in the Big4 firms you basically move up one step grade every year whatever your performance) would have benefitted me?
More importantly, I wonder if I would be writing this post from a different angle (and probably about 3 years ago), both from the perspective of someone who didn’t go to University, but also as someone who had taken the leap to pursue something I enjoy professionally a little sooner.
The entrepreneurial effect
My last thought (finally, he’s ending this babble) is what I would refer to as the entrepreneurial effect. A lot of people I see today, who are looking to make their lives better by changing their careers, are actually moving towards endeavours which do not require a degree. Most of them don’t seem to regret their paths to date, but many do question whether their degree was really a prerequisite to their current success. Most doubt that it was.
Additionally, I look around at the people I respect. The entrepreneurs that I look up to and one day wish to emulate. It’s fairly interesting how many of these people don’t have a university degree.
What is maybe more important are the life lessons these people have learned and the experiences they have been able to enjoy being around other likeminded driven entrepreneurs in their early 20s rather than laying around drunk most of the time finding excuses not to study!
Non-financial benefits of University
Usually when I have heard this debate previously, some people always say that they wouldn’t want to give up their “University experience”.
I find this a little difficult to swallow. I enjoyed university as much as the next man. I loved the social clubs, I loved the sports, I loved going out every night, I loved it all.
However, what would have happened if I chose to work at 18 instead of going to University? Would I have just not played sports? Not joined any clubs? Never gone out? Never met great friends?
Personally, I’m not sure that the difference between the two scenarios from a social side is worth all that much if you embrace life when taking the alternative route.
Conclusion – is it worth going to University in 2015?
Having already been to University, and having thoroughly loved it, I’m still not convinced that it is financially worthwhile going to University. If I was 18 again, would I change my decision? I truly don’t know.
All I do know is that I’m pleased the decision was so much easier back when I was young. I really wouldn’t want to be making that choice now.
Financially, it seems to be about break-even to me, and perhaps (against common belief) I think that someone with good grades (and a good brain) at A-level may actually be financially better off not going to University and heading straight into the job market whilst simultaneously exploring further education and knowledge.
However, from this analysis, I have learned two much more important lessons:
- The returns that we obtain from our investments and how we manage our money clearly have much more impact on our future wealth than whether we go to university or not.
- Just in case my unborn children want to go to University in the next 20 or 30 years, I better get saving so that they don’t need to take out even more loans on top of the low-interest government loans. In our real-life example above, these students would be in a much more difficult situation if they have to fill that £7k per year shortfall themselves rather than getting help from their parents.
So, what do you guys think?
Did you go to University?
Do you think it was a worthwhile endeavour for you financially?
How about if you had the choice today? Would you change your decision based on the ever increasing costs of obtaining a University education?
What do you think about the assumptions? Does a 50th percentile university student equate to a 50th percentile A-level student?
I would really love to hear your opinions on this and get some debate going. Therefore, please leave a comment below and we can have a good old chat about it all (whether you joined the University debating society or not!)…