Funded by the Nuffield Foundation
Under the current higher education (HE) funding system in England, the government pays around £21 billion to fund the education of each cohort of around 480,000 English-domiciled full-time undergraduate students studying anywhere in the UK. This covers spending on students at higher education institutions or at alternative providers that are eligible to charge full tuition fees. It includes payments to universities (largely tuition fee payments funded by government student loans, but also teaching grants) and to students towards their living costs while at university. In the long run, the government gets back part of this initial outlay as graduates make repayments on their student loans. Under current rules and economic projections, the long-run cost will be mostly borne by graduates, but how much exactly is hugely uncertain. (Students from other parts of the UK are eligible for greater government support, so for them a larger share of the long-run cost is borne by the taxpayer.)
The HE system in England is funded primarily through tuition fees. Due to binding caps on the level of tuition fees that institutions can charge, nearly all courses cost between £9,000 and £9,250 per year. Direct teaching grants for universities only amount to around £1,100 per student and year on average, with only some ‘high-cost’ subjects attracting a substantially higher level of direct government funding. This means that for most courses, total teaching resources per student amount to around £10,000 per year.
For most English-domiciled students, all of this funding is initially provided by the taxpayer. This is because English-domiciled students studying for their first undergraduate degree can take out government-subsidised loans to cover the full cost of tuition fees. In addition, they are eligible for so-called maintenance loans to cover part of their living costs. These loans normally accrue interest at a rate between the rate of RPI inflation and RPI inflation plus 3%, depending on a graduate’s income (the interest rate is capped at the “prevailing market rate”, which is based on market interest rates for unsecured consumer credit). They are repaid on an income-contingent basis: graduates repay 9% of their income over a threshold (currently £27,295) and any outstanding loan is written off at the end of the repayment period (currently 30 years) with no adverse consequences for graduates.
As announced in February, there will be substantial changes to this system from the 2023 university entry cohort onwards. For these cohorts, the repayment threshold will be lower (around £24,000 in 2023 prices) and the repayment period will be longer (40 years instead of 30 years). However, the maximum student loan interest rate will be lower, too: from the 2023 entry cohort onwards, all students will be charged interest at the rate of RPI inflation. These changes are discussed in more detail under ‘Past and future changes to the system’ below.
Consequences of the funding model
The current system ensures that students attending university for the first time do not need to pay any up-front fees to attend university and have access to living costs support in the form of maintenance loans. However, the amount of maintenance loan a student is eligible for depends on their parents’ income, and even the maximum rates are low compared with living costs in many parts of the UK. As a consequence, most students spend more than the maximum maintenance loan, and many students who do not receive parental transfers rely on part-time work to fund their studies.
For graduates, this system means that those with low earnings later in life contribute very little towards the cost of their degrees, whereas the highest-earning graduates pay back more than they borrowed because of interest accrued on their loans. The strong link between repayments and lifetime earnings under the current system is illustrated in Figure 1. For the 2022 university entry cohort, we expect graduates in the lowest 10% of lifetime earnings to pay back around £6,000 on average towards their student loans, because they will rarely earn above the repayment threshold. At the other end of the scale, average student loan repayments of the highest-earning 20% of graduates are likely to be more than £65,000.