The Economics of Higher Education: Costs and Benefits
1. Opportunity Cost of Higher Education
Opportunity cost is the value of the next best alternative forgone when making a choice. For students choosing higher education, this primarily means giving up the opportunity to enter full-time employment after completing A Levels. By attending university, students sacrifice several years of potential earnings while also paying tuition fees.
Extract 1 states that tuition fees could rise from £3,290 to a maximum of £9,000 per year. Although many students take out loans to cover these costs, repayments begin once graduates earn over £21,000, reducing their future disposable income. Students also face living costs while studying.
Despite these costs, students may benefit from an estimated additional £160,000 in lifetime earnings compared with non-graduates. However, graduate unemployment reached 8.9% in 2010, meaning some students may not receive the expected financial return. For students from low-income families, grants of up to £3,250 and bursaries reduce some of the financial burden, but concerns about debt may still make employment a more attractive alternative. Therefore, students must weigh the short-term costs against the potential long-term benefits of gaining a degree.
2. Private and External Benefits of Degrees
University education creates both private benefits for individuals and external benefits for society.
Private Benefits for Students
Private benefits are those received directly by the student. A degree improves skills and qualifications, increasing human capital and making graduates more productive. This can lead to:
- Higher wages
- Better career opportunities
- Improved job security
However, these benefits are not guaranteed, as evidenced by the 8.9% graduate unemployment rate in 2010. Students must also consider the impact of significant debt.
External Benefits for Society
External benefits are positive effects enjoyed by society. A more educated workforce raises labour productivity, helping businesses become more efficient and encouraging investment. A world-class university system contributes to long-term economic growth and attracts overseas students, generating export earnings. Graduates may also create new ideas and innovations, benefiting firms and increasing future living standards.
Because students mainly consider their own private benefits and costs, they may ignore these wider social benefits. This means the marginal social benefit (MSB) of higher education is greater than the marginal private benefit (MPB), causing under-consumption if left to the free market.
3. Price Elasticity of Demand (PED) Analysis
Price elasticity of demand (PED) measures how responsive demand is to a change in price.
Calculating Tuition Fee Impact
The percentage increase in tuition fees is calculated as: ((£7,000 − £3,290) ÷ £3,290) × 100 = 112.8%
- Low-income households: PED = -14 ÷ 112.8 = -0.12
- Better-off households: PED = -9 ÷ 112.8 = -0.08
Both values are between 0 and 1, meaning demand for university education is price inelastic. Although tuition fees increase significantly, applications fall by relatively small amounts. This suggests students still view a university degree as a worthwhile investment.
However, the increase affects groups differently. Applications from low-income households fall by 14%, compared with only 9% for better-off students, suggesting poorer students are more discouraged by higher fees. Furthermore, prestigious universities and courses like Medicine and Law are unlikely to experience large falls in demand, whereas newer universities and Arts and Humanities courses may see larger reductions.