Follow us
Publications Commentary Research People Events News Resources and Videos About IFS
Home Education Spending Education spending - higher education

Education spending - higher education

Students in classroom

Higher education

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 420,000 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 roughly evenly split between graduates and the taxpayer. (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.)

Student finance calculator >>>

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 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 in most cases. 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 accrue interest at a rate that depends on a graduate’s income. 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.

Consequences of the funding model

This 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, many students who do not receive parental transfers need to 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 as a result 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 2021 university entry cohort, we expect graduates in the lowest 10% of lifetime earnings to pay back less than £2,000 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 10% of graduates are likely to be nearly £80,000.


Note: Repayments are given in undiscounted CPI real terms (2021 prices). Includes the effect of RPI reform. For methodological details, see ‘Frequently asked questions’ section of the IFS student finance calculator.

Source: IFS student finance calculator; author’s calculations.


The rapid progressivity of the repayment system looks somewhat different when repayments are thought of as a percentage of average lifetime earnings: the lowest-earning 10% of graduates repay around 0.4% of their lifetime earnings, while the highest-earning 10% of graduates repay around 1.6% of their lifetime earnings. But the figure is highest in the upper middle of the graduate earnings distribution, with average repayments of people in the seventh, eighth and ninth deciles amounting to more than 2% of lifetime earnings.

Notably, we expect nearly 80% of graduates not to clear their loans by the end of the repayment period. As a result, the system functions like a graduate tax for most graduates: moderate changes to the repayment rate, repayment threshold or repayment period essentially constitute a tax rise or cut. In contrast, moderate changes in the loan interest rate have no effect on most graduates’ lifetime repayments.

This is not the case for the highest earners, for whom the system functions more like a standard loan contract. For these graduates, the key parameter of the system is the interest rate: the higher the interest rate, the more they repay, provided they do not make voluntary repayments. In contrast, moderate changes to the repayment rate, repayment threshold or repayment period will mostly affect how quickly these graduates pay off their loans rather than how much they repay in total.

On the university side, a key consequence of this system is that the bulk of teaching funding is not centrally controlled and therefore not subject to short-term budget pressures: spending on student loans automatically rises in proportion to the number of (home) students admitted. This is advantageous for universities, but makes it more difficult for the government to control spending. A more subtle effect, highlighted in our previous work and emphasised in the 2019 Augar Review, is that funding varies less across subjects than the cost of provision: in many cases, lab-based subjects appear to be cross-subsidised by social science and humanities subjects that are cheaper to teach. This gives universities an incentive to shift provision towards subjects that are less expensive to teach, which is unlikely to align with government priorities.

Accounting for the cost of student loans

Accounting for the cost of student loans under this system is a challenging task. First, it requires a prediction of student loan repayments for decades into the future, which by nature is subject to a large amount of uncertainty. Second, one needs to take a stance on how future receipts should be valued relative to current expenditure.

The UK government’s approach is to model student loan repayments using a prediction model of individual borrowers’ loan sizes, earnings and repayments. This model primarily relies on historical data on student loan performance from the Student Loans Company and macroeconomic forecasts from the Office for Budget Responsibility. It is used to generate two different statistics:

  1. the Department for Education’s ‘RAB charge’, which is a measure of the long-term cost of student loans;
  2. the ONS’s ‘write-off share’, which measures the share of student loans that is not expected to be repaid produced by the Office for National Statistics and is used in the UK National Accounts.

These two measures differ in how future receipts are valued relative to current expenditures; they represent two different approaches to splitting student loans into a graduate share and a taxpayer share (see Figure 2). Neither of these indicators is ‘better’ than the other; rather, they are answers to different questions.

Figure 2. Two ways of accounting for the cost of student loans

Note: Includes the effect of RPI reform. For methodological details, see ‘Frequently asked questions’ section of the IFS student finance calculator.

Source: IFS student finance calculator; author’s calculations.

The RAB charge measures the expected long-run government cost of providing student loans, considering the government’s cost of funding the loans (rather than other government projects). In contrast to the write-off share, the RAB charge crucially depends on an assumed discount rate meant to capture the opportunity cost of government funds. In technical terms, the DfE’s RAB charge discounts future repayments using a discount rate for financial assets set by the Treasury (RPI inflation + 0.7%).

The write-off share used in the National Accounts is the share of student loans not expected to be repaid. It is the result of partitioning student loans issued into a grant element (oddly counted as capital spending) and a loan that is expected to be repaid in full, which can be treated like other government loans in the National Accounts. The write-off share would be the same as the RAB charge if future repayments were discounted according to the actual interest rates charged on student loans (between RPI inflation and RPI inflation + 3%, depending on the borrower’s earnings). In fact, the write-off share is typically higher than the RAB charge, because the interest rate on student loans is mostly higher than the discount rate used to construct the RAB charge.

As the government’s student loan model is not publicly available, we have developed our own model of individual graduates’ loan amounts, earnings and repayments using a different methodology that does not rely on confidential data on past student loan performance. We use that model to estimate various measures of the cost of student loans according to both the DfE and ONS approaches. For the 2021 university entry cohort, our estimate of the RAB charge stands at 42%, which translates into a long-run taxpayer cost of loans of £8.2 billion, and our estimate of the write-off share stands at 51%, which translates into an initial grant element of £10 billion. Partly due to methodological differences in the student loan model, these estimates differ somewhat from official government estimates. (For instance, the latest DfE forecast for the RAB charge is 53% compared with our 42%; for a detailed explanation, see ‘Why does this model forecast a lower RAB charge for the current system than DfE forecasts?’ in the ‘Frequently asked questions’ section of the IFS student finance calculator.)

Student loans and the budget deficit

In the absence of any policy changes, student loans affect the government budget deficit (public sector net borrowing) in a given year in two ways. First, the portion of new loans that is not expected to be repaid is recorded as (capital) spending. Second, like interest on other government loans, the ‘modified’ interest accrued on the remaining portion of all existing student loans is counted as a (current) receipt. The total deficit impact of student loans in a given year is then the difference between these two values. In the 2020–21 fiscal year, spending on new loans was £10.6 billion and modified interest receipts were expected to be £2.5 billion, resulting in a total deficit impact of £8.1 billion.

Changes in policy or in student loan forecasts can affect both the partitioning of student loans into grant and loan elements and later receipts in the form of interest accrued. This complicates the National Accounts treatment of existing loans. Under the ONS’s methodology, changes to the partitioning of student loans as a result of forecast changes will never affect the budget deficit, but will be recorded in the National Accounts as ‘other economic flows’. The same is true for policy changes affecting past cohorts, unless they ‘significantly [alter the] loan stock value’.

Quirks in student loan accounting

One important point to note about this way of accounting for student loans is that both the RAB charge and the write-off share are constructed using the Retail Prices Index (RPI) to assess the value of loan repayments relative to initial outlays. As a result, the reform of RPI announced by the government in November 2020 has important effects on both indicators, even though it will only have a very small real effect on student loans.

Under the plans, RPI will be calculated in the same way as the Consumer Prices Index including owner-occupiers’ housing costs (CPIH) from 2030. CPIH inflation is typically around 0.8% lower than RPI inflation calculated using the traditional methodology. This will lead to a ‘real’ reduction in the interest rate charged on student loans, as that interest rate is currently linked to RPI. But the effect that will dominate as far as the government finances are concerned is the ‘accounting’ change in how much repayments are valued: future student loan repayments will have a higher value in the calculation of both the RAB charge and the write-off share, so both measures of the cost of student loan issuance will fall. As shown in Table 1, we estimate that RPI reform will reduce both the RAB charge and the write-off share for the 2021 cohort by around 4 percentage points, translating into a reduction in the long-run cost of loans by around £700 million and in the initial accounting write-off of £600 million per cohort.

Table 1. Impact of RPI reform on student loan accounting


Without RPI reform

With RPI reform

Long-run taxpayer cost of loans



RAB charge



Grant element of student loans



Write-off share



Source: IFS student finance calculator.

For the write-off share, reductions in the interest rate charged on loans will have a similar effect. A lower interest rate means that loans become more ‘affordable’ for graduates, so a larger share of each student loan will be paid off with interest, and thus a lower share of each loan is written off under the ONS’s ‘partitioned loan’ accounting methodology. The somewhat counterintuitive implication for the public finances is that lowering interest rates and thus making loans more attractive for students also lowers the initial cost of loans for the Treasury. This lower initial outlay will be more than counterbalanced by lower interest accrued in later years on the proportion of each loan that will be fully repaid.

Changes and outlook

Since the current system of university funding in England was introduced in 2012, it has been subject to constant tinkering by successive governments. According to stated government policy, the fee cap is meant to increase with inflation every year, but it has in fact only been increased once (in 2017) and is now set to remain frozen until 2023. This amounts to a policy change practically every year, which has complicated universities’ financial planning and distorted any modelling of the future cost of student loans.

On the repayment side, the repayment threshold is supposedly linked to average earnings, but it was frozen in nominal terms before it could increase for the first time in 2016 (supposedly until 2021). In a surprising change of policy, it was then raised to £25,000 in 2018 and has since risen with average earnings. These policy changes essentially constitute retrospective changes to student loan contracts and have been criticised by consumer rights advocates.

While future reform efforts are likely to be directed at making the system less expensive for the taxpayer, the government may also seek to address two other points of criticism. The first is the incentive for universities to shift provision towards courses that are inexpensive to teach, which results from the mismatch between funding and the cost of provision highlighted above. The second is the high interest rates charged on student loans, which far exceed the government’s cost of borrowing. As a result of these high interest rates, students whose families can afford to pay up front and who are confident of paying back any loan are better off without student loans. This disadvantages young people whose families cannot afford to pay up front; it likely also erodes trust in the system more generally.

Barring offsetting changes to student loan repayments, addressing these issues will require more rather than less taxpayer funding. As suggested by the Augar Review, dealing with the first criticism requires a lower tuition fee cap in combination with a realignment of teaching grants to achieve greater differentiation in funding by course (overall funding levels could remain constant on average). The most practical way of addressing the second criticism is to reduce the interest rate charged (rather than a real-terms repayments cap as suggested by the Augar Review, which would add complexity to an already complex system). Both reforms would shift the balance of funding towards more direct public funding and away from graduates themselves, as shown by Figure 3. While a substantial realignment of funding across courses could be achieved with only a relatively minor increase in public funding, a reduction of the interest rate on student loans to anywhere near the government cost of borrowing would make the system much more expensive for the taxpayer.

Note: The grey line models the current system. The green line models a cut in the fee cap to £8,500. The red line models a cut in the interest rate to the rate of RPI inflation (independent of earnings). Includes the effect of RPI reform. For methodological details, see ‘Frequently asked questions’ section of the IFS student finance calculator.

Source: IFS student finance calculator.

A greater reliance on direct public funding would mark a partial rollback of the 2012 reforms and would bring the system of higher education funding in England more in line with those in other European countries. Evaluated in isolation, both a lower tuition fee cap and a lower interest rate would be regressive, in the sense that the highest-earning graduates would benefit the most (in cash terms). However, the government could make up for both the cost and the regressiveness of any reform by funding it through tax increases on high earners.



Our methodology is available here.

Related work

We have constructed a new student finance calculator, based on our detailed analysis of graduate earnings and the student finance system, which allows users to look at the effects of changing any parameter of the system.
Briefing note
This briefing note describes the range and level of COVID-related spending on education in England.
Briefing note
In this briefing note, we assess the key policy announcements made in the DfE’s recent ‘Skills for Jobs’ White Paper around the funding of post-18 education.
MPs will debate a number of petitions today relating to university tuition fees. These petitions are asking for all or part of tuition fees for the 2019/20 or 2020/21 academic year to be reimbursed. Between them, they have gathered nearly a million signatures.