On Sunday, the Prime Minister Theresa May 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.

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

The combined impact of these changes is to increase the RAB charge to 45%, up from 31%.

Chris Belfield, 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%.”

ENDS

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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.

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.