Ever increasing postgraduate debt without salary upside

Throughout Europe, earning a postgraduate degree can be expensive. Even in countries where tuition is free or cheap, students may have to pay accommodation and other living costs, particularly at private institutions. Those who cannot afford to pay upfront will have to take on student loans with interest. They will thus incur debt…lots of it, even before they set foot on the career ladder.

Besides, careers in science are not always financially rewarding enough for students to get out of debt easily after they complete their studies. The lessons learned from the case study of the UK, recently published by a charitable body, called The Intergenerational Foundation, London, UK, entitled The Graduate Premium: manna, myth or plain mis-selling?, should give food for thought to other European countries thinking about going down that route.

Indeed, the UK Government has been selling student loan book at a huge discount to private finance institutions. Due to lack of parliamentary oversight these institutions could fairly easily raise repayment charges in the future. And where debts have already been purchased, these institutions have already changed the terms and conditions of repayment to make profits and satisfy the need of their shareholders. This, in turn, will place further pressure on to the financially impoverished–albeit intellectually enriched–postgraduate students. For many PhD students, things will get worse. Some postgraduates go on to receive a stipend by the time they start their PhDs. However, it may not cover all the costs of students and lead to further debt.

Coming to a country near you

After the sub-prime mortgage scandal and the banking collapse, the financial community has eagerly been seeking new opportunities. In selling the student loan book to private finance enterprises the UK government has followed the US and woken the last great sleeping cash cow: student debt. This is exacerbated by the Government’s lack of effective regulatory protection and their removal of almost all State funding from the university system in the UK. Thus, private for-profit education and finance providers find it relatively easy to enter the market and transfer the costs directly on to the students themselves.

Despite these concerns, the demand for such loans is guaranteed. Indeed, so many people have degrees that employers have come to expect and demand, for all but the most menial of jobs. For many professions, a second or third degree is now required–at additional cost to the student–where, previously, a Bachelors’ degree would have sufficed.

The private enterprises, which own student loans books, will need to ‘sweat’ these assets, in the future, to please shareholders. In a barely regulated environment, this will prove very difficult for graduates of the future if salaries, particularly in academia and research remain low. If the US–and now the English experience–is anything to go by, passing the burden of university funding from the State onto students and privatising the loans, should be resisted in the rest of Europe.

The cost of postgraduate education

Postgraduate fees are still free or cheap in most of European countries. Particularly for their own citizens, as these largely remain Government funded. In the UK, Oxford and Cambridge Master’s Degrees–referred to in acronyms as MA (Oxon) and MA (Cantab)–are awarded upon successful completion of a Bachelors’ degree merely for a small administration fee. However, postgraduate Master’s and further degrees are very expensive–due to fees, accommodation and other costs–and often take many years of study.

It is, therefore, more important than ever that students take note of the future earning potential (The Graduate Premium) of a course. But, they also need, in an equally important way, to examine the global reputation of the institution attended, as this will impact future employment prospects and earnings. Due to their cost to students, it is essential that, once graduated, the student earns a large premium as a result of their postgraduate study. This is the only way to justify and pay-off the huge debts incurred by all but the richest students.

The Graduate Premium is not always there, according to The Intergenerational Foundation report. So what does this mean for the career prospects of researchers trained in the UK? Many will have to take out loans during their postgraduate training before they embark on a PhD; the latter may require further loans to supplement a too small stipend, when one is on offer at all.

Spiraling student loans

In England, for instance, there are planned Master’s degree loans of up to £10,000 a year for fees. These would typically not cover the total cost or even the course fees. And there are no maintenance loans available. In addition, there are planned postgraduate research loans of £25,000. Any money required above this will have to be borrowed.

In reality, most students will have to take out the current Professional Career Development Loans offered by private finance institutions with their high-interest rates–typically of 8% to 9%–and a harsh five-year capital repayment terms out of any income remaining. For a UK student, studying for a Master’s in Business Psychology at the London School of Economics, for example, costs £18,000. The same applies to all students whether domestic or overseas, which is £8,000 above the current Government-backed tuition loan threshold. Often, the £8,000 have to be borrowed from a private finance institution. Together these loans will add up to a sizeable figure.

Indirect high marginal tax rates

What is more, in the UK with the £10,000 master’s loan comes a further 6% charge on the graduate’s pay check known along with other Graduate loan repayment charges as “Willetts Taxes” (named after David Willetts, the government minister responsible for these changes in UK University Finance) on gross income, which is a loan repayment deducted from income at source. This, de facto, creates the sort of high marginal tax rates witnessed under the Harold Wilson governments of the 1960s and 70s.

For example, an income taxpayer with a post graduate degree earning between £43,001 to £150,000 will fall under the 40% income tax rate, therefore, be further burdened with 12% National Insurance deductions plus 15% Willetts Taxes, giving a 67% marginal rate. And for those taxpayers earning more than £150,000 and paying the top rate of 45%, they will have a marginal rate of 72%.

Worse, the mooted PhD research loans could attract a further Willetts Tax in addition to the above. This could then prove a disincentive either to study or, for those who have taken out students loans, stay in the UK. These sorts of marginal rates led to the “brain drain” of the 1960s and 70s and may well do again.

Volatility of loan conditions

First announced as part of the UK’s Chancellor’s 2014 Autumn Statement, these government-backed postgraduate student loans have now been reconfirmed as part of the 2015 Spending Review. If they were a genuine tax, there would at least be effective, democratically accountable government oversight. But they are not. And there are no plans for more than a ‘light touch’ oversight, if any.

Other points to remember is that both tuition fees and the terms of student finance and loans can be changed at any point–and already have been changed many times. There is no need for primary legislation and parliamentary debate or oversight, all that is required is a ministerial and/or departmental decree.

Finally, as previously mentioned, the loan book–the student debts– is being sold off to private enterprises. The mortgage-style pre-1998 loans already have with the terms being changed almost immediately. These and future privatised debts could well be securitised in the future. This is already the case in the USA with the looming problems that such an approach entails. Who is to know whether investors will persuade a compliant government in the future to allow them to radically change the terms again to enable them to ‘sweat’ their assets and increase the return?

Post-graduate degree value deflation

Just like undergraduate degrees, postgraduate degrees are losing their value in the job market due to over-supply. And employers are spoilt for choice. The percentage of new job seekers in the UK with post-graduate degrees is now greater than the proportion of candidates (13%), who were graduates seeking employment, back in 1980. In many ways, this post-graduate cohort has replaced the 1980s graduate cohort in the hierarchy. They now earn the premium that graduates in 1980 enjoyed.

Due to the large numbers of candidates with post graduate degrees, many jobs now require a postgraduate degree of some sort, where in previous years they did not. Meanwhile, fees are rising and the terms of the loans and their repayments are becoming ever more onerous.

Should the present English system be copied throughout Europe, then this would require closer scrutiny before implementing it. The rising costs of gaining a postgraduate qualification is associated with a risk of contracting ever increasing debt. Therefore, it is essential that many factors such as cost/debt/status of institution attended/potential future earnings and many others outlined in the Intergenerational Foundation study be considered carefully when deciding whether to pursue post-graduate study, however much the course may appeal.

Ultimately when the true levels of debt and their consequences become apparent, there will be a drastic fall in the number of UK students going into research, teaching and other relatively low-paid careers. Especially with future interest rate rises and the predicted future changes to the terms and conditions. Should other countries follow suit, the same will happen there.

In this globalised world, there will still be those more enlightened countries with Governments who see the benefits of an educated population and whose graduates can travel and fill the gap in the UK jobs market that these debts will create. Meanwhile, there are plenty of coffee shops looking for well-qualified Baristas with the requisite master’s degrees…, preferably with a distinction, of course.

Steve Kemp-King

Steve is the author of the Intergenerational Foundation report The Graduate Premium, manna, myth or plain mis-selling. His background is in specialised publishing, focusing on science, public health, offshore finance and tax.