On Sunday, the Prime Minister announced that the income
threshold above which graduates start making repayments on their
student loans would be increased from £21,000 to £25,000 for all
those who started university after 2012.
New analysis by the Institute for Fiscal Studies (IFS) shows that
this apparently small technical change will save middle earning
graduates a lot of money - up to £15,700 over their lifetimes. It
also represents a big shift in policy raising the long run cost
to the taxpayer of providing higher education by around 40%, or
over £2.3 billion a year in the long run.
Tuition fees will also be frozen. In the short term this is a
much smaller change, reducing the debt on graduation of the next
cohort of students taking three-year degrees by just £800 and
saving government £0.3 billion. In the long run it will be
unsustainable as university funding falls in real terms.
Key findings:
Increasing the repayment threshold to £25,000 reduces the annual
repayments of graduates earning more than £26,500 by £500 in 2020
(in cash terms). This reduces average lifetime repayments by
around £10,000 (2017 prices), or by up to £15,700 for those in
the middle of the graduate earnings distribution. As a result,
83% of graduates will not have fully repaid their loans by the
time they are written off 30 years after graduation (up from
77%).
This change alone increases the long-run taxpayer cost of
providing HE by £2.3 billion per year – a 41% increase. The
effect is so big because the policy significantly reduces
repayments by almost all graduates.
The lowest earning 40% of graduates are now better off under the
current system than they would have been under the pre-2012
system. This is because the new higher repayment threshold only
applies for post-2012 loans, and so despite having larger in
debts low earning graduate make smaller repayments under the new
system
Freezing tuition fees only has a small impact in the short-run.
This reduces the debt on graduation of a student starting a
three-year degree in 2017 from £50,600 to £49,800. This only
reduces the repayments of the very highest earning graduates as
most do not repay their loans in full.
Freezing tuition fees in cash-terms reduces university funding
and saves the government £0.3 billion a year in the long run. The
impact on universities is small is the short-run but will grow
the longer the freeze is kept in place. This creates uncertainty
about future university income and makes it difficult for
universities to make long-term plans.
The combined impact of these changes is to increase the RAB
charge to 45%, up from 31%.
Chris Belfield, a research economist at IFS and an author of the
report, said:
“Raising the repayment threshold to £25,000 is a seemingly small
change to the student loan system, but it will save middle
earning graduates up to £15,700 in repayments over their
lifetimes. This comes at a considerable cost to the taxpayer,
raising the long-run cost of providing Higher Education by £2.3
billion per year, an increase of 40%.”
Notes to Editors:
The briefing note entitled “Higher Education finance reform:
Raising the repayment threshold to £25,000 and freezing the fee
cap at £9,250” by Chris Belfield (Research Economist at IFS), Dr
Jack Britton (Senior Research Economist at IFS), and Laura van
der Erve (Research Economist at IFS) was published on Tuesday 3
October 2017 and can be found here on the IFS
website: https://www.ifs.org.uk/publications/9964
This research was funded by the ESRC Centre for the Microeconomic
Analysis of Public Policy (CPP) at IFS. Jack Britton would like
to thank the British Academy for funding through a postdoctoral
grant. The authors would like to thank the Department for
Education for providing the linked NPD–HESA data.
Our estimates focus just on young English-domiciled full-time
undergraduate students. We assume that earnings will grow in line
with the Office for Budget Responsibility forecast for average
economy-wide earnings growth from the January 2017 Fiscal
Sustainability Report and the November 2016 Economic and Fiscal
Outlook. We assume no dropouts and that all students take out the
full amount of the loans to which they are entitled and pay them
back according to the repayment schedule (with no early
repayments and no avoidance). Students repay 9% of their income
above a threshold which increases with average earnings growth
from 2021. Any debt left outstanding 30 years after graduation is
written off. Therefore, if a graduate has not finished repaying
the principal value of their loan after 30 years, all the
interest accrued is written off and the graduate is unaffected by
the interest rate charged.
Unless stated otherwise all figures are in 2017 prices.
Government cost figures have been discounted back to 2017 using
the government’s discount rate for the student loan system of
RPI+0.7%. Student cost figures have not been discounted, but are
deflated back to 2017 prices using CPI inflation.
To estimate the total cost of the system to government, we use
2015–16 HESA statistics on the number of English-domiciled
full-time undergraduate students that started university in
2015–16.
The ‘RAB’ charge
measures the proportion of total loans the government expects to
write off.
