Student finance reforms ‘leap in the dark’ for public finances – IFS

The Institute for Fiscal Studies warns that some unadvertised changes to student repayment thresholds could significantly alter the cost of loans for all post-2012 graduates

The Institute for Fiscal Studies (IFS) has warned that government reforms of the student loans system have added uncertainty to public finances, with “a quirk in accounting rules” likely to have vastly overestimated potential taxpayer savings.

Other changes to repayment thresholds announced when the government responded to the Augar review earlier this year make the reforms “a leap into the unknown”, the IFS said.

New analysis from the economic think tank says that the chancellor of the exchequer has likely overestimated the savings that reducing loan interest rates would deliver. The “accounting quirk”, which allowed the chancellor to claim the rate cut would benefit graduates and the public finances, is likely to be worth half of the predicted £6 billion saving.

The IFS took issue with a major student finance change that “was not mentioned at all in the Department for Education’s press materials” even though “it could be hugely significant for the future of the student loans system”.

The government announced in February 2022 that the £27,295 repayment threshold for graduates between 2012 and 2022 will freeze until 2024/25. But, after the end of the freeze, the Treasury will switch from using average earnings to the retail price index (RPI) to adjust repayment thresholds for all plan 2 borrowers.

The report calculated that this change could have significant repercussions for borrowers and taxpayers.

The eventual impact of the reform is hugely uncertain and will depend on economic developments and government policy many decades into the future – Ben Waltmann, IFS

According to the Office for Budget Responsibility, “average earnings growth is set to outpace consumer price growth by 1.8 percentage points per year” this decade, which would increase the proportional cost of loans dramatically. The IFS also warns that the last 15 years saw little to no growth in graduate salaries, a trend that, if prolonged, could prove costly to graduates when repayment thresholds are untethered from earnings.

“The government’s policy choices have made the taxpayer cost of the student loans system less predictable,” the IFS report warned. “The change in the indexation of the repayment threshold ties the cost of loans more strongly to future earnings growth. As a result of the extension of the repayment term, graduate earnings in 40 years’ time will matter for student loans, and these earnings are even harder to predict today than earnings in 30 years’ time. The freeze in the repayment threshold means that the future cost of loans will hinge on the unpredictable path of inflation in the next few years.”

Elsewhere, the report warned the reforms significantly recast the burden of the cost of higher education from high- to middle- and low-earning graduates, the IFS said. Those with lower-middling earnings graduating after 2023 will likely pay £30,000 more than comparative graduates before the reforms, while high-earning graduates will repay around £20,000 less.

Warned Ben Waltmann, IFS senior research economist: “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 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.”

The IFS warned earlier this year that the tuition fees freeze will  “quietly tighten[…] the financial screws on students, graduates and universities”.

The government seeks with its reforms to reduce the overall cost of higher education to the taxpayer. Figures calculated before ministers announced its reforms found that the public would pay 53% of the value of outstanding loans.

A vice-chancellor warned in February that student loans may be having an impact on everything from first-time buyers’ housing travails to the falling birth rate.

Read more: Tuition fee reform did not spark university innovation, Cable laments

Related comment: Does the government response to Augar threaten higher education for all?

Leave a Reply

Free live webinar & QA

Blended learning – Did we forget about the students?

Free Education Webinar with Class

Wednesday, June 15, 11AM London BST

Join our expert panel as we look at what blended learning means in 2022 and how universities can meet the needs of ever more diverse student expectations.

Send an Invite...

Would you like to share this event with your friends and colleagues?