Education Pays, But Also Costs
Subject Factor markets
Topic Labor Markets
Key Words Tuition fees, grants, expenses, debts, income, interest rates
News Story

The ruling Labour Party is planning to change the way that U.K. students pay for a university education. In 1997, it had introduced tuition fees and eliminated maintenance grants for living expenses. Politicians were deeply affected by the anger of parents of students during the recent election campaign. Although education is cheaper than in the U.S., students are balking at paying up to $1500 a year for tuition and $5,000 for living expenses, because they graduate with debts averaging $17,000.

The Government is aware that graduates earn on average $460,000 more than non-graduates over their lifetimes, so a free education is not in the cards. One idea is that graduates should pay a small proportion of their income back to the government once their income rises above a certain level. Another idea is to charge higher interest rates to richer students to help the poorer students.

(Updated November 1, 2001)

1. Investing in education is similar to investing in capital equipment. Benefits and costs over an appropriate time horizon are weighed.
a) What formula is used to calculate the net present value of an investment in a college education?
b) What are some practical examples of educational benefits and costs?
c) What time period should be used?
2. In 1997, the government introduced tuition fees and eliminated maintenance grants.
a) How did that affect the investment calculation?
b) In what way did the timing of the fees and living expenses have a significant effect on students' investment calculations?
3. Now the Government is discussing levying an additional tax on graduates after a certain income level has been reached.
a) Explain carefully how this would affect the investment calculation.
b) Would individuals be more or less likely to attend university? On what does your answer depend?
c) Why might this approach to paying for college be more palatable to students and their parents?
Source Rachel Sylvester, "Parental anger behind a policy switch," The Daily Telegraph (U.K.), October 7, 2001.

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