Student finance

How much does university really cost?

There are a large number of misconceptions about the true cost of university. Some of these misconceptions overestimate the cost, while others underestimate it. So if your students ask you how much university really costs, what is the honest answer?

In many ways the honest answer is that there is no honest answer, because different students will contribute different amounts for their university education due to the way the student loan repayment system works. But nonetheless let’s start with a few facts about tuition fees and living costs.

University tuition fees

This article focuses on undergraduate courses for “home” (i.e. not international) students in England where the standard fee charged at the time of writing is typically £9,250 per year. This is the maximum that universities are allowed to charge, and with a small number of exceptions the maximum is charged for almost all courses at all universities.

An interesting question to consider is whether every course ought to command the same tuition fee. We know that there are considerable average earnings disparities between graduates who have studied different subjects and also between graduates who have attended more selective universities compared to less selective ones. This could mean that it stands to reason to charge more for certain subjects (e.g. Medicine) or for certain institutions (e.g. Oxbridge). However, there is a risk that if some courses were more expensive than others then students from more disadvantaged backgrounds would be more reluctant to apply for them. Many of us (myself included) tend to find the second of these two arguments most compelling, and so there is a logic to the flat fee.

Though it is probably the fairest way, one implication of having the same fee across the board is that it does mean that more selective universities and courses do tend to offer a slightly higher return on investment in terms of future career earnings (though it must be stressed that Higher Education is so much more than a financial investment).

University tuition fees have always been something of a political football and will likely remain so in the future. Historically, (like so much else in life) the price of tuition fees has only ever moved upwards. Yet there is some uncertainly as to where they will move next as Philip Augar’s recent review of Post-18 education suggested reducing tuition fees to £7,500 per year. A full government response to the review is expected later this year.

Living costs

It goes without saying that living costs can vary from student to student. But one rough way of getting a feel for how much students spend on living costs is to look at the size of maintenance loans provided by the government for living costs. At the time of writing, a student who lives away from home (and outside of London) receives £9,203 per year in maintenance loan if their household income is below £25,000. Those with higher household incomes receive less, though the theory is that parental contributions will top up students’ incomes to the same amount. If you take the full maintenance loan and divide it by twelve you arrive at £767 – a figure which is very close to the £795 per month average monthly spend reported in a survey by Save the Student. Accommodation tends to be the biggest living cost and with a budget of £100/week for accommodation this would leave £334 per month for everything else.

The true cost of university is always unknown

At this point then we can start to add together some of our figures in an attempt to work out a total cost. With £9,250 per year for tuition fees and £9,203 for living costs this works out at £18,453 per year and £55,359 over a three year course.  So this means that your students should be asking themselves whether or not their university education will really be worth £55,359, right?  

Wrong. The reality is that the true cost of university always remains a mystery, often until some point 30 years into the future. This is because of the way the student loan repayment system works. The vast majority of students do not pay a penny of their tuition fees themselves but rather they fund them through a loan which goes straight from the government to their university. Students’ maintenance loans also fund some (though not always all) living costs. Graduates will only pay this money back if they go on to earn above a certain threshold (£26,568 at time of writing) and those who never reach this threshold won’t pay a penny. Those who do reach the threshold pay back a proportion of their wages for a maximum of 30 years at which point their “debt” is wiped. Even two students who borrow the same amount and then pay it all back could end up paying different amounts in total - very high earners who pay it back quickly will end up accruing less interest compared to those who earn a bit less and take longer to pay back their loans. 

You might be surprised to hear just how few graduates are projected to pay back their loans in full. A recent projection from London Economics found that 24% of graduates are not expected to repay any of their loans and 86% will never repay their loans in full. Then again, even some graduates who don’t end up paying their balance down to £0 may still pay back more than they borrowed in real terms because of interest charged, which is at a rate higher than inflation. 

Without a crystal ball, no student can predict how much of their student loan they will actually be paying back. Even a student who could realistically estimate their income in the period 30 years after graduation would be assuming that the goal posts won’t be shifted one way or another in terms of repayment rules. Mainstream politicians in the United States have recently mooted the idea of forgiving some or all of the student debts of some American graduates, reminding us that even though such an initiative would always be unlikely it is certainly not inconceivable. On the other side of this coin is the possibility of a future government making things less favourable for graduates, perhaps by extending the 30 year repayment period up until the point of state retirement age (which itself could also be raised). 

The one cost of university we all forget

Most of us think we have a good understanding of what is meant by the cost of something – mainly because we spend so much of our lives purchasing things. But if you take a glance at some of the academic studies on the graduate earnings premium you will notice that there are many different “costs” which have to be factored in when trying to determine the extent to which graduates make more money than non-graduates. 

Economists understand that as well as more traditional costs, life is also full of “opportunity costs”. These arise when we are faced with a choice as to which of two paths we should walk down. If I can walk down either path A or path B, then the total “cost” of path A  is in fact the actual cost of walking down it plus any amount which is lost by not walking down path B. In the context of university, the true cost then might be the actual cost of university plus the cost of not doing the alternative. Suppose that the alternative was to spend three years working in an office job earning £18,453 per year, then all of a sudden the opportunity cost of going to university is £55,359 (look familiar?). For many students, the opportunity cost is actually the largest cost of all. 

This might all sound a bit clinical, but it can offer a useful perspective by reminding students that there are ways to reduce opportunity costs (for example by doing a degree apprenticeship or summer internship) and things to avoid which will push the opportunity cost higher (for example, resitting a year to due poor performance whilst at university). The opportunity cost perspective can also remind us that the living costs of university are not as high as we might think. The true living costs of university may not necessarily be what we calculated above. Rather, the true cost is the difference between the cost of living at university and the living costs which would still have been incurred had the student not attended university. 

In conclusion...

In summary, your students may never be able to accurately work out the true cost of university. The best they should aim for then is an understanding of how student finance works and an acceptance that life can be unpredictable, financially and otherwise. 

Perhaps of more interest to your students though is not the cost of university but the value of it. This isn’t any easier to calculate because some things (such as a lifetime of happy memories, or the chance to study a subject you love) are just priceless.   

Follow Paul @Paul_Ed_Martin    



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