Universities follow perverse incentive models disconnected from the labor market

Wednesday 06 July 2022 06:15


Paul Ormerod

Paul Ormerod is an economist at Volterra Partners LLP and an author.

The number of students disappointed with college admissions will be higher this year (Photo by Dan Kitwood/Getty Images)

THE days go by with the summer ritual of the announcement of the baccalaureate results. Yet panic is already spreading among those who want to enter college in the fall.

The number of applicants has increased by 5% this year, according to the University Admissions Service (UCAS). In addition, many universities are reducing the places offered. The net result is that more young people than usual will be disappointed.

As Prime Minister, Tony Blair was famous for setting a goal of ensuring that 50% of students headed to the hallowed halls of the university. He doubled down and said it should, in fact, be 70%.

Last week a row erupted after Sheffield Hallam University suspended its English Literature course due to a lack of demand.

Despite all the criticism, at least, unlike Blair, they met the demands of the job market. Most students graduating from elite Russell Group universities continue to benefit from the so-called graduate bonus. Their lifetime earnings will be higher, often considerably, than those of non-graduates. But for many others who are lugging around heavy textbooks, that’s just not the case. Their degree adds little to their value in the labor market.

Student loans are repaid according to a complicated formula, but as a guide, you need to earn more than the national average before you have to make any notable repayments.

In a background paper released in April, the House of Commons Library noted that only 25% of current students will repay their loans in full. From 2023, recent changes made by the government ease the conditions of the loans. About half of prospective students are expected to repay in full, while the other half may never have to repay.

The amount of debt outstanding is staggering. At the end of the 2020/21 financial year, it was £141bn. The government predicts that even at current prices this will reach well over £500billion by mid-century.

Many graduates will only receive the national average salary during their working life. And each student’s average debt at the end of their course is £45,000. So why go to college? Of course, if you’re in the top 25%, it’s worth it financially.

For other students, they will have a loan, but may never reach the threshold to repay it, and the skills they have learned will not equip them for the job market. The universities themselves are encouraged to keep them. Otherwise, they will lose the money attached to each student in the form of tuition fees.

In other words: the money keeps flowing to them, regardless of how they help their students with their future careers. This is a grossly unequal result. The bottom 50% of students will never pay off their debt and graduate with a noticeable difference in their earning power.

There is, of course, an argument to be made that subjects in the humanities should not be the province of the wealthy.

Indeed, the economy, which underlies this same argument, is a crucial tool in the lives of young people.

But the incentive model on which universities are built has been inflated by a loan system designed to consider only a target number of students in higher education, not the benefit of what they receive – or the government debt.

Blair’s goal was built on the basis that higher education would lead to social mobility. Instead, it did the opposite, at significant cost to the taxpayer.