The value of government support for living costs for university
students from the poorest families will fall to its lowest level
in seven years in the coming academic year, as maintenance loan
entitlements will fail to keep up with inflation. As a result,
even students entitled to maximum maintenance loans will have to
make do with substantially less than they would earn working in a
minimum wage job.
These cuts in support are entirely due to forecast errors: annual
increases in maintenance loans are based on inflation forecasts
made years in advance, and inflation has recently been much
higher than originally forecast. Remarkably, there is no
mechanism in place for these errors ever to be corrected.
The new analysis carried out
at the Institute for Fiscal Studies finds:
- At only 2.3%, the cash-terms increase in entitlements for the
coming academic year will fall far short of consumer price
inflation, which is set to be around 8% over the relevant period.
This will add to a similar shortfall for the current academic
year, when the uplift was 3.1% compared with inflation of more
than 6%.
- Students from the poorest families will lose £1,200 in the
next academic year, or £100 per month, compared with what support
would have been had the inflation forecasts been correct.
- For the first time since 2003/04, the maximum maintenance
loan entitlement will fall more than £1,000 short of what a
22-year-old student would earn if they worked in a job that paid
the National Minimum Wage instead of studying.
This comes on top of a long-running freeze in the parental
earnings thresholds that govern eligibility for means-tested
maintenance support. The lower parental earnings threshold, below
which students are eligible for the maximum maintenance loan, has
been frozen in nominal terms at £25,000 since 2008 (had it been
indexed to average earnings, it would now be around £35,000). The
effect of this freeze will be particularly painful in times of
high inflation: many students’ parents will see their income rise
in cash terms but fall in real terms. As a result, many students
will be eligible for smaller maintenance loans, even though their
parents will be less able to support them.
A simple fix would be to use more recent forecasts and correct
remaining errors when actual values are known in the following
year. Alternatively, as recommended by the Augar Review of
post-18 education, increases in maintenance support could be tied
directly to increases in the minimum wage. The parental earnings
thresholds should be indexed either to inflation or to a measure
of earnings growth.
None of this is affected by Friday’s announcement of a change in
the way the government sets student loan interest rates, which
avoids the ‘interest rate roller coaster’ we had warned about in
April. While that change is welcome, it will do nothing to ease
current cost-of-living pressures for students – and indeed for
the vast majority of graduates. This is because most of those
with undergraduate loans will likely never pay off their loans in
full, so the interest rate never affects their repayments. Even
for those who do repay in full, the interest rate will typically
only impact their monthly repayments in their late 40s or early
50s.
Ben Waltmann, Senior Research Economist at the Institute
for Fiscal Studies and the author of the briefing,
said:
'In the coming academic year, government support for student
living costs will be cut to its lowest level in seven years,
which will cause genuine hardship for students on tight budgets.
Bizarrely, this is happening because student maintenance loan
entitlements are routinely adjusted based on outdated inflation
forecasts, and forecast errors are never corrected.
'This makes no sense at all. The government should use more
up-to-date forecasts and correct for any errors in the following
year to avoid permanent cuts. Alternatively, maintenance
entitlements could be tied to earnings on the minimum wage, as
proposed by the government’s own Augar Review.'
