Reducing student loan repayment threshold to below £20,000 could save £3.8 bn, report suggests

A change in the repayment threshold is just one of the avenues for HE savings explored by HEPI in today’s report, commissioned in response to claims that cuts to the sector will be made in the government’s next spending review

Today (10 June) sees publication of a report on how proposed changes to the student loan system, such as reducing the repayment threshold, would likely play out.

The modelling, by London Economics, was commissioned by the Higher Education Policy Institute (Hepi) in the wake of predictions that the government will look to make budget cuts to higher education in its next spending review.

The report comes at a time of intense debate about the anticipated government response to the post-18 review of education and funding.

In The Times on Friday, the editor of the Spectator James Forsyth suggested that promised investment in further education will come from higher education budgets. The resignation of the education recovery tsar Kevan Collins demonstrates, Forsyth said, “how many tough spending decisions are to come”.

According to the well-connected editor, ministers are discussing several options. To lower government liabilities, ministers might reduce student numbers, reduce funding via a tuition fee cut, and increase graduate contributions by lowering the loan repayment threshold, hiking interest rates on loans or extending the repayment phase.

The Hepi report makes the case for maintaining student numbers.

London Economics report conclusions

Increasing the repayment period from 30 to 35 years
Today’s report suggests that such a move would save the government close to £1 billion and reduce the proportion of loans written-off from 54% to 50%. The Augar report backed an even longer 10-year increase in the repayment term, as ‘we believe borrowers should continue to repay their loan for as long as they benefit; we judge this to be 40 years after study has ended.’

Reducing the repayment threshold for post-2012 student loans from £26,575 to £19,390
The analysis calculates that this would reduce the cost of one cohort of students by a total of almost £3.8 bn (£2.2 bn less on tuition fee loan write-offs, £1.6 bn less on maintenance loan write-offs). On average, both male and female graduates would repay around £10,000 more. Should the repayment threshold be lowered, the government loan write-off would fall from 54% to 33%, approximately the rate expected when the current system was introduced. The proportion of former students not repaying their entire loan would drop from around nine-in-ten (88%) to three-quarters (76%), while the proportion who never pay a penny would roughly halve (from 33% to 16%).

Removing real interest rates
Such a move would be costly (with an annual cost of £1.2 bn) and regressive, helping only the best-paid graduates; others do not come close to repaying their loan, irrespective of interest, before the 30-year cut off.

“It makes little sense to spend less on education during a time of crisis,” said Nick Hillman, Hepi director and author of the paper, ‘No easy answers: English student finance and the spending review’.

“There are strong arguments, for example, to spend more on higher education when the labour market is changing so fast, when the number of 18-year-olds is growing and when the amount that institutions receive to educate each student has been eroded by inflation.”

If cuts are on the table, says Hillman, “some ways to save money will be more damaging than others. The main options are reducing student places, spending less on each student, or recouping more money from graduates by changing the terms of student loans. Cutting places at a time of rising demand is particularly unwise, as is giving institutions less for teaching when their finances are already so squeezed.”


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On reducing the write-off costs by reducing the repayment threshold or extending the repayment period, Hillman said tweaks “might not be popular”, but could deliver savings for the public purse “if politicians are determined to find them”. Reducing the repayment threshold to under £20,000 raises so much it might even enable new initiatives, such as the return of maintenance grants, alongside saving money, he added.

It makes little sense to spend less on education during a time of crisis – Nick Hillman, HEPI director and report author

HEPI’s suggestions have drawn short shrift from the University and College Union general secretary, Jo Grady, who discerned little in the way of fairness in the proposals.

“Offering students a choice between paying their loans back for longer, or reducing the salary threshold at which they begin repaying them, is no choice at all,” she said. “Both maintain the stranglehold of student debt and lowering the threshold to £20,000 is particularly regressive, hitting the least affluent hardest.

“Ministers, and those in think tanks, would do well to remember that even lower-earning graduates already spend most of their 30s and 40s paying effective tax rates of over 40%. A threshold reduction to well below the average workers’ salary would make that a reality for many graduates fresh out of university too, making it harder for them to plan and save for the future.

Grady said businesses, “who benefit so much from the graduate skills base”, should be made liable for student loan repayments.

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