New study shows financial benefit of part time degrees

An analysis of the earning potential for part-time students qualifying in England at the age of 37 – the average age of an Open University graduate – underlines the benefits not just for the individual but also for the public purse.

Higher earnings mean a higher tax take for the UK Treasury. The study, commissioned by the OU from specialist consultancy London Economics, estimates that such an increase in earnings would lead to someone in England paying £191,000 more in tax over their working life in cash terms.

The findings add strength to the argument that providing extra UK Government support to part-time study in England would bring clear economic benefits far higher than the cost of study.

The Open University has called for the UK Government to provide financial support to part-time students in England to reduce the cost of study, and help reverse the dramatic fall in numbers studying since the changes of 2012.

In addition, better incentives for more flexible study through shorter courses, better information, advice and guidance (IAG) for adults and support for progression through to HE at Levels 4 and 5.

Mary Kellett, Acting Vice-Chancellor of The Open University, said:

“There are big potential returns for both students and taxpayers that can be unlocked by studying a part-time degree as a mature student. This research shows that supporting people to study part-time is a smart investment for the UK Government to make.

“It provides further evidence of the large costs to society of the collapse in part-time higher education in England caused by the 2012 funding reforms. The UK Government needs to provide financial support to part-time students in England either through a tuition fee grant or through maintenance grants for part-time students. This will help deliver the skills our country needs by encouraging those already in work to ‘earn and learn’ and give real study choices to people of all ages and backgrounds. One option for providing this financial support is by introducing maintenance grants for part-time students as is happening in Wales following recommendations from the independent Diamond Review.”

London Economics used the same methodology employed by the UK Government to develop a sophisticated model which looked at the earning potential of two types of part-time graduate – those whose previous qualifications included two A-levels and those who had only GCSEs when they began their studies (around a third of OU degree students).

The report found that getting a part-time degree was associated with lifetime earnings on average £238,000 higher in cash terms for a man graduating at the age of 37 who began their studies with two A-levels. It was associated with lifetime earnings on average £377,000 higher in cash terms for a similar student who previously had only GCSEs.

The additional tax paid by such an increase in earnings would lead to a male graduate paying between £123,000 and £191,000 more tax over their lifetime in cash terms.

Table 1 – Estimated total lifetime earnings returns from completing a part-time degree at the age of 37 (undiscounted, cash terms)

The report concludes: “The analysis illustrates that there are substantial lifetime benefits to graduates and the Exchequer associated with Open University part-time degrees.”

London Economics used the same investment methodology as the UK Government to compare the returns associated with a part-time degree to the potential returns from alternative investments. The results demonstrate that the estimated returns from investing in a part-time degree are high for both the individual and for the Government and far exceed the costs of study:

1. They estimate the net present value. This estimates the returns from investing in a degree after adjusting for the timing of future graduate earnings increases. London Economics estimated that, for a representative male graduate, these returns were up to £188,000 – a net graduate premium of up to £93,000 and a net Exchequer benefit of up to £95,000.
2. They estimate the internal rate of return to the public purse. This is the annual rate of return that would be required to make an alternative investment generate higher returns than investing in a degree. London Economics estimated that this was 25% for male graduates and 19% for female graduates who began their studies with two or more A-levels.

Table 2 – Estimated net present value of completing a part-time degree at the age of 37 (using the HMT Green Book discount rate of 3.5 per cent)

London Economics is one of Europe’s leading specialist economics and policy consultancies. They have previously carried out analysis of the returns to higher education qualifications using a very similar methodology for the UK Government and the Russell Group, among others.

The report uses data from the Labour Force Survey to estimate the lifetime earnings experienced by someone who obtains a degree at the age of 37 compared to the lifetime earnings experienced by similar individuals who do not obtain a degree. This is the same approach used by official analysis estimating the returns to higher education qualifications carried out by the UK Government. Full details of the methodology can be found in the report.

The data quoted in the main press release refers to the estimated returns for 37-year-old male graduates. The estimated returns are lower – though still high – for women due to factors ranging from career breaks, caring responsibilities and the gender pay gap (see Tables 1 and 2).

The lifetime earnings estimates in Table 1 refer to the total increases in real earnings and real tax receipts associated with someone completing a part-time degree at the age of 37. They are not adjusted for the timing of earnings increases. For example, an increase in real earnings of £10,000 is valued at £10,000 regardless of whether it occurs next year, in 5 years’ time or in 20 years’ time. This press release refers to these inflation-adjusted estimates as being in “cash terms”.

The net present value estimates in Table 2 adjusts the estimates of total lifetime earnings presented in Table 1 to reflect the fact that society places a lower value on money received several years in the future than that same sum of money today (e.g. due to anticipated economic growth and the ability to earn interest from alternative investments). This is the standard methodology that the UK Government and businesses use to compare the value of different investments. The analysis uses the same real discount rate of 3.5 per cent used by the UK Government (see HM Treasury, Green Book, 2018). This means, for example, that the net present value calculations assess real earnings increases in 20 years’ time as being worth only half their face value.