The Conservative and Liberal
Democrat parties – along with a range of other stakeholders –
have issued proposals for reforming the terms of Plan 2 student
loans, which were issued to English students who started
university between 2012 and
2022.
Under the Conservative party's
proposal to reduce interest rates, graduates would
see lower loan balances than under current
policy. There would be no short-run impact on repayments,
but over the long run the most recent cohort of graduates
would repay around £11,000 less each on
average (with benefits concentrated among those with higher
lifetime earnings).
The Liberal Democrat proposal to
increase the income threshold at which graduates start
to make payments would save the average
graduate who took out loans in
2022/23 around £8,000 over their lifetime (with
the biggest benefits for those on lower-middle lifetime
earnings). Graduates would see lower monthly repayments, but loan
balances would be higher than under current
policy.
Despite these very different effects,
the long-run cost to the exchequer of the two plans is similar:
£4 billion for the 2022/23 cohort under the Conservative
proposals, and £3 billion for the same cohort under the Liberal
Democrats' proposed reform. Costs would be slightly smaller
for each of the earlier cohorts of
students.
Proposals by the campaign group
Rethink Repayment are much broader and come at much
greater cost to the exchequer; they would roughly
halve expected lifetime loan repayments for the last cohort
of graduates with Plan 2 loans, with a long-run exchequer cost of
around £12 billion for this
cohort.
Finally, proposals
that couple reductions in the loan repayment
rate with a longer write-off period could reduce
graduate repayments earlier in working life, while increasing
them later on. This would still shift repayments
between different groups of graduates, but could be designed
to be approximately cost-neutral for
taxpayers.
Kate Ogden, a Senior Research
Economist at IFS and the author of the briefing,
said:
‘There is a wide
variety of proposals for student loan changes that
differ substantially in cost and in terms of
who is most affected. The
Conservative Party's proposal to reduce interest rates
would have benefits for graduates
with middle and, in
particular, higher lifetime earnings in the
longer run, but would not reduce how much graduates
are repaying in the
short term. The Liberal Democrats' proposal
to raise the repayment threshold would cut repayments
sooner and have larger benefits for graduates with
lower-to-middle lifetime
earnings, with little benefit for
higher earners.'
ENDS
Notes to Editor
Options for changing Plan 2 student loans:
costs, benefits and distributional effects is an
IFS briefing by Kate Ogden.
The briefing is
available to read here on the IFS website
