From education to employment

Student loans reform is a leap into the unknown

Ben Waltmann, Senior Research Economist at the Institute for Fiscal Studies

New analysis, “Student loans reform is a leap into the unknown” by the Institute for Fiscal Studies of the package of reforms to student loans announced this year shows how we are moving away from a system which redistributes heavily from high to low earning graduates.

Under the new system, most will just pay back what they borrowed – neither more nor less.

This moves us away from something very much like a graduate tax to something for which the term ‘student loans system’ is much more appropriate.

The reforms:

  • Will affect the cohorts starting university in 2022 and 2023 quite differently. Those expecting high earnings – for example those attending high status institutions and studying subjects with high expected earnings like economics, medicine or law – could gain substantially by delaying entry until 2023. That way they would benefit from a lower interest rate on their student loans. Those with lower expected earnings might be better off entering university in 2022 rather than 2023.  They would benefit from a shorter repayment period (30 instead of 40 years) and a higher earnings threshold for repaying their loans.
  • Will result in graduates from the 2023 entry cohort repaying around £750 a year more from 2027-28 (when they typically start repaying loans) if earning more than £34k. Graduates from earlier cohorts since 2012 earning more than £33k in 2026/27 (when the 2022 cohort will typically start repaying) will have to pay around £400 more than under the pre-reform system. 
  • Greatly increase the uncertainty in the public finances. With a lower discount rate, an extended repayment period, and a change to the indexation of the loan repayment threshold that makes the system less responsive to economic conditions, uncertain earnings levels far into the future will greatly affect the long-term cost of the reforms.

In addition, our analysis shows how a quirk in accounting rules meant that a reduction in the interest rate charged on student loans managed to benefit both graduates and the public finances.

Clearly, the reality is that a lower interest rate on student loans will cost the Exchequer money in the long run. But this accounting quirk has allowed the chancellor to record a £6 billion improvement in borrowing for the 2025/26 fiscal year as a result of student loans reform in his recent Spring Statement – roughly double what we estimate will be the true long-run cost saving of the reforms.

These new findings complement our initial analysis, which showed:

  • Among graduates from the 2023 university entry cohort, those with lower-middling earnings will be hit the most by the changes with a lifetime loss of around £30,000. These borrowers enjoyed large taxpayer subsidies before the reform, but will have to pay back a much larger share of their loans under the new system.
  • The highest-earning graduates from the 2023 entry cohort will repay around £20,000 less as a result of the lower interest rate. These graduates would largely have paid back their loans in full even under the pre-reform system. For them, the lower interest rate translates into lower repayments overall.
  • The system will also become substantially less generous for middle-earning graduates from the 2012–22 starting cohorts. These students are substantially affected by changes in repayment thresholds, but do not benefit from lower interest rates. Compared with the pre-reform system, they stand to lose around £20,000.

Ben Waltmann, Senior Research Economist at the Institute for Fiscal Studies, said:

‘Student loans reform will reduce the cost of loans for the taxpayer and the highest earners, whereas borrowers with lower earnings will pay a lot more. How much more exactly is inevitably uncertain, but our best estimate is that lower-middling earners from the 2023 entry cohort onwards face the highest extra cost at around £30,000 over their lifetimes. The eventual impact of the reform is hugely uncertain, and will depend on economic developments and on government policy many decades into the future.  

‘Substantial uncertainty in the cost of student loans is to be expected. But the government has needlessly added uncertainty by freezing student loan repayment thresholds in nominal terms at a time when inflation is high and unpredictable. This may mean that the reform will raise more money – or less – than the government intended.’

Updated IFS Student Finance Calculator

The Updated IFS Student Finance Calculator produces rough estimates of the costs and distributional consequences of different reforms to the student loans system in England. All numbers are reported for a single entry cohort of students (the default is the 2022 entry cohort). The default system is the system that will apply to the 2022 cohort (some parameters are deflated to reflect nominal freezes).

Get the facts about student loan reform from DfE

24th Feb 2022: DfE have announced a radical shake up of the higher education system:

Under our proposed new measures, our world-leading higher education sector will aim to deliver the highest quality education for all students while providing even better employment prospects. At the same time, our reforms will lessen the burden of student loans on the taxpayer, and we will reduce interest rates for new students starting from 2023, so that under these terms future graduates do not pay back any more than they originally borrowed in real terms.

We are aware of some claims being made in the press that don’t provide a full picture of how our reforms will work. Here we explore some of them.

CLAIM: Students will end up paying back far more than they borrowed under our proposals.

THE FACTS: We are aware of some figures quoted in national newspapers that suggest students will be paying back more than they borrowed. It is important to be clear that these figures do not take inflation into account. When inflation is taken into account – so in real terms – under these terms no graduate will pay back more than they borrowed. It is also important to be clear that student loans are not like commercial loans – repayments will be paused if you find yourself unemployed or if you salary drops below the threshold.

For those starting university in September 2023 and onwards, we will be reducing their student loan interest rates in line with inflation as measured by the retail price index (RPI). What this means in practice is that, under these terms, graduates will not have to repay more than they borrow, adjusted for inflation. In combination with an extended tuition fee freeze to 2025, this will reduce the loan debt for a typical student starting a 3-year degree in September 2023 by up to £6,500 at the point they start repaying. When the total seven-year fee freeze from 2018 is taken into account, this totals up to £11,500 less debt at the same point.

In addition to this, the earnings threshold for new borrowers starting courses from September 2023 will be set at £25,000 until 2026-27, and the length of the loan will be increased to 40 years. Graduates will not need to make repayments if they earn below this amount. Under these terms future graduates do not pay back any more than they originally borrowed in real terms.

CLAIM: Students will pay back tens of thousands of pounds more under our proposals than they would without our proposed reforms

THE FACTS: New borrowers starting in the 23/24 academic year are expected to borrow an average of £39,300, in 21-22 prices. Under our proposals we forecast that the average borrower will repay £25,300 in 2021-22 prices over the course of their loan. This compares to £19,500 under the current system, without any intervention.

CLAIM: These reforms will affect lower earners more than higher earners

THE FACTS: We are still protecting the lowest earners. Anyone earning under £25k won’t repay anything. Higher earners – those on £33,390 or more – will pay back a maximum of £58 per month more per month in the financial year 27/28 than they would have paid under the current system without intervention. Someone earning £26k will only repay £2 per month more in the same year.

CLAIM: These reforms mean higher education is not going to be a good investment

THE FACTS: For most going to university is a good investment. In 2020, young graduates typically earned £6,500 more per year than their non-graduate counterparts.

But there are still too many graduates who do not see the full benefit of going to university and in many cases this is because their degrees do not necessarily lead to well-paid employment. For example, at 25 universities and other education providers, less than half of students who begin a degree can expect to finish that degree and find professional employment or further study within 15 months of graduation.

We are already working with the Office for Students to make sure that courses are of a high quality and to help prospective students understand the prospects courses can offer.

In response to the recommendations made by the Augar panel, we are going to be seeking views on exploring the use of targeted student number controls as a possible option to stem the growth of low quality courses.

It is also right that we have the conversation about low level minimum eligibility requirements, which could be a return to the old requirement of 2 ‘E’ grades at A Level or equivalent, or a grade 4 requirement at GCSE in English and maths or equivalent, with exemptions of course including for mature students.

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