Student finance changes will mean uncomfortable trade-offs, IFS warns

The research institute warns that student finance reform is now all but inevitable, but warns imposing changes “progressively” may prove impossible

Deep inside the Treasury, the chancellor and his mandarins are busy preparing the comprehensive spending review, which will likely bring sweeping changes to the student finance system – but the Institute for Fiscal Studies (IFS) warns there are “no easy choices” for policymakers under pressure.

The research institute warns that student finance reform is now inevitable in the wake of Covid financial pressures, with graduates all but set to encounter high levels of contributions.

Many people perceive degrees as too costly to taxpayers, the IFS observes – and the student finance system offers no checks or balances on university student recruitment, leaving Whitehall at the wheel with no brakes.

But the IFS warns that all proposed changes would disproportionately affect graduates on average salaries and, in some cases, actually lessen the financial burden on the highest-earning graduates, which could detract from the system’s “most desirable characteristic, that it is progressive”.

The report sketches out the impact of several measures – increasing repayment rates, extending loan terms to 40 years, lowering repayment threshold to £20,000, and lowering interest rates to the Retail Price Index (RPI).

It accompanies a new IFS calculator that shows the impact of these changes on government and graduate finances.

Increasing the repayment rate – currently 9% of salaries over the repayment threshold – would be “politically unpalatable” because it would significantly increase the monthly tax bill of graduates with average earnings. With the introduction of the new health and social care levy, alongside employer and employee national insurance, income tax and student loan repayments, the marginal tax rate on those that graduated after 2015 and are earning £30,000 is set to be 50%. This figure, the IFS assumes, cannot, realistically, go any higher.

Researchers split graduates into 10 groups based on their earnings to model how progressive each change would be. Those in group one are the 10% of graduates with the lowest salaries. Those in group 10 are the 10% of graduates with the highest salaries.


Read more: Abolish student loans, says Hepi report


The Augar review lobbied for a longer repayment term, mooting a 10-year extension to 40 years after graduation: this would not affect groups one, two or three much, who do not contribute much or anything to the cost of their tuition, or the very highest-earning group, who repay their loans inside the current 30-year cut-off point. Instead, this change would most significantly impact the overall lifetime contributions of above-average earning graduates, represented by the 5th to the 9th groups.

Lowering the repayment threshold – also mooted by the Augar review – would, similarly, impact middle-earning graduates the most. The highest-earning graduates in groups nine and 10 would pay the same or less over their lifetime under this model because they would clear their debt faster.

But those in groups two to eight – the vast majority of graduates – would pay significantly more over their lifetime. The IFS says that to ensure the highest-earning graduates pay an equivalent proportion of their salaries as lower-paid earners, the Treasury would need to alter interest rates.

But the chancellor Rishi Sunak may be reluctant to increase interest rates, the IFS warns. Previous chancellors were motivated to keep interest rates on student loans high because of Treasury rules on deficit calculations. Higher interest rates on student loans “substantially lowered the short-run budget deficit on paper, regardless of whether the loans would ever be repaid”, because it was all treated as money the government would get back.

But rule changes have reversed this – “only the share of student loans that the government expects to be paid back with interest is treated as a conventional loan”, the IFS notes, and “the rest is treated as spending”. Sunak may be, therefore, reluctant to amend the student finance system in such a way that increases the short-term Treasury deficit even if, ultimately, higher interest rates make the loans more socially progressive and economically valuable to the public purse.

The estimated cost of government subsidy for full-time undergraduate students in England remained the same  this year for the second year running – with the public purse expected to be accountable for just over half of student loans taken out in 2020/21.


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

Could Covid sound the death knell for tuition fees?

Related news: Spending on student loans to hit £13bn by 2026, OBR predicts

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