Data Insight: Graduating in austerity: Measuring the impact of welfare cuts on degree choices and university graduation

This Data Insight by Dr Farshad Ravasan and Dr Taheya Tarannum draws on the Longitudinal Education Outcomes (LEO) - England dataset to examine the effects of welfare cuts on students entering higher education.

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Welfare cuts driven by austerity policies add financial burdens to households. Not only do the recipients face direct impacts in the form of reduced benefits, but these cuts could also hurt jobs and affect the local economy. While it is essential to understand the impact of welfare cuts on household finances, little is known about their impact on education decisions. Such impacts could especially be consequential for those who are transitioning between stages of education. 

One such demographic is young adults, who still depend on their parents to fill gaps in financial support but are making important decisions about their careers, such as whether to enrol in higher education, which university to attend, and which subjects to study. For them, a small distortion in their current education choices could have a long-lasting impact on their future career or income.

One of the biggest overhauls of the UK welfare system in recent history was implemented through the 2012 Welfare Reform Act. Local authorities faced significant welfare cuts under this reform, although the extent of cuts varied across areas. We study the impact of the 2012 reform on the career choices of university students by comparing those who lived in the local areas that experienced deeper welfare cuts and those who lived in less-affected areas before and after the reform. 

Using the LEO dataset, we find that the period leading to the welfare reform saw marked improvement in the KS4 pass rate and KS5 enrolment rate. The gains in KS4 and KS5 were the highest among deprived students, narrowing the socioeconomic gaps in educational outcomes. Although higher education enrolment remained largely stable over this period, deprived students made some gains in entering higher education. The graduation rate from universities, however, shows a small dip, especially around the time of the welfare reform. Also, the same period shows that the students entering universities were more likely to poorly match (i.e., undermatch) to their degrees. An investigation of how much of this was caused by the 2012 Welfare Reform Act shows that the reform had a negative impact by making students more likely to undermatch to degrees and less likely to complete their degrees. Students from more deprived backgrounds experienced a greater negative impact on degree completion.

Key findings 

• The late 2000s and early 2010s saw marked improvements in the key stage 4 pass rate and key stage 5 enrolment rate.
• Higher education enrolment remained largely stable over this period, but students entering universities were more likely to be poorly matched to their degrees.
• Students from local areas that experienced larger welfare cuts during the 2012 welfare reform were 5.3% more likely to make poor matches to degrees and 1.3% less likely to complete their degrees.
• While the impacts on student-degree quality matches are the same across students from different socioeconomic backgrounds, the negative impact on degree completion is greater for students coming from more deprived backgrounds.

Why it matters 

The quality of the degree has implications for future earnings

The findings suggest that austerity-driven welfare cuts compel university entrants to choose lower-quality degrees relative to their academic performance. The complementarity between student quality and degree quality has important implications for future earnings. Studies have found that high-ability students who attend low-quality degrees earn less in the future compared to their well-matched peers (Cavaglia et al. 2024). Thus, welfare cuts could increase inefficiency in the higher education market by forcing students to match with low-quality degrees, and the resulting impact on earnings could be felt across generations.

Deprived students need extra support to narrow the inequality in higher education

The negative impact on degree completion observed among deprived students indicates that, while means-tested maintenance support has widened access to higher education for disadvantaged groups, it has been insufficient to protect them from the adverse effects of sudden economic shocks. The existing higher education gap between the most- and least-deprived students has been well-documented by Crawford et al. (2017), who show that students from disadvantaged backgrounds are more likely to drop out, less likely to finish degrees within five years, and less likely to attain a first -class or upper second-class degree than their advantaged peers. These differences persist even when comparing students with similar attainment or schooling background. 

Together, these findings suggest that policies designed solely to increase participation are unlikely to eliminate inequalities in higher education outcomes. More targeted support is needed to provide sufficient insurance against adverse income shocks during study. In this context, the government's proposal to reintroduce a means-tested maintenance grant for students from lower-income households represents a move towards strengthening the student support system, although the proposed grant is substantially less generous than the maintenance grant scheme abolished in 2016 (Bolton, 2024).