Two major changes to student finance were proposed in the Budget. The replacement of maintenance grants by loans from 2016–17 will raise debt for the poorest students, but do little to improve government finances in the long run. The proposed freezing of the repayment threshold for loans, on the other hand, will – if implemented – significantly improve government finances because it will result in an increase in graduate repayments.

These are the main findings of a new briefing note published today by the Institute for Fiscal Studies (IFS), funded by the Economic and Social Research Council.

Replacing maintenance grants with loans

The poorest 40% of students going to university in England will now graduate with debts of up to £53,000 from a three-year course, rather than up to £40,500. This will result from the replacement of maintenance grants of up to nearly £3,500 per year by maintenance loans worth up to £550 a year more.

Students from households with pre-tax incomes of up to £25,000 (those currently eligible for a full maintenance grant) will have a little more “cash in pocket” whilst at university. But they will also graduate with around £12,500 more debt, on average, from a three-year course. This means that students from the poorest backgrounds are now likely to leave university owing substantially more to the government than their better-off peers.

We estimate that, as a result of this reform:

  • In the short term, government borrowing, as recorded in the national accounts, will fall by around £2 billion per year. This is because current spending on grants counts towards current borrowing, while current spending on loans does not.
  • In the long run, savings will be much less than this. The amount of money lent to students will rise by about £2.3 billion for each cohort, but only around a quarter of these additional loans will be repaid. The net effect is to reduce government borrowing by around £270 million per cohort in the long run in 2016 money – a 3% decline in the government’s estimated contribution to higher education.
  • About two-thirds of those eligible for the full maintenance grant will repay no more as a result of this reform because they will end up with the additional debt being written off. For the remaining third, repayments are forecast to continue for an extra four years on average, with contributions rising by around £9,000, on average, in 2016 money.

Freezing the repayment threshold

A number of other proposals on higher education funding were also put forward in the Budget. If enacted, the one that will have the greatest impact on graduate repayments – including for current students – is the announcement that the repayment threshold for student loans will be frozen at £21,000 for five years.

This means that repayments will start at a lower level of income than previously expected (close to the value of the pre-2012 threshold of £15,000 in real terms by the end of the freeze period). We calculate that (given the change from maintenance grants to loans described above):

  • Graduate loan repayments will increase by a further £3,800, on average, per student in 2016 money, reducing the long-run cost to government of issuing student loans by around £1.4 billion per cohort of students.
  • This change will hit middle-income graduates hardest, as they will end up paying more per year for the majority of the repayment period. We estimate that an individual on median graduate earnings will repay over £6,000 more in total in 2016 money.

Commenting on the research, Jack Britton, Research Economist at the Institute for Fiscal Studies (IFS), said:

“While the small increase in support for living costs available to students from lower-income families will undoubtedly be welcomed by many, the switch from maintenance grants to maintenance loans will result in substantially higher debt for the poorest students. For most, though, it is the freezing of the repayment threshold which will do more to raise loan repayments, and hence increase the cost of higher education.

“The 2012 reforms appear not to have had a negative effect on higher education participation amongst full-time students from poorer backgrounds. This likely reflected the fact that the system was designed to protect both that group and those with low expected lifetime earnings. Only time will tell whether these new changes will be similarly benign in their effect.


Notes to Editors:

  1. In the Budget, the Chancellor also proposed allowing universities with high teaching quality to raise fees in line with inflation from 2017–18, and to review the discount rate applied to student loans. These changes are discussed in more detail in the briefing note.
  2. The briefing note entitled “Analysis of the higher education funding reforms announced in Summer Budget 2015” by Dr Jack Britton (Research Economist at the IFS), Dr Claire Crawford (Assistant Professor of Economics at the University of Warwick and Research Fellow at the IFS) and Professor Lorraine Dearden (Professor of Economics and Social Statistics at University College London and Research Fellow at the IFS) was published on Tuesday 21 July.
  3. The authors gratefully acknowledge funding from the Economic and Social Research Council via the Centre for the Microeconomic Analysis of Public Policy.
  4. Our estimates focus just on young English-domiciled full-time undergraduate students. We assume that earnings will grow in line with the Office for Budget Responsibility forecast for average economy-wide earnings growth from the June 2015 Fiscal Sustainability Report and the July 2015 Economic and Fiscal Outlook; specifically, average (but variable) real earnings growth of 1.1% per year from 2016–17 to 2020–21 and 1.5% per year real earnings growth subsequently. We assume that all students take out the full amount of the loans to which they are entitled and pay them back according to the repayment schedule (with no early repayments and no avoidance). We use the government’s approved discount rate for assessments of the student loan system of RPI+2.2%.
  5. All figures are in 2016 prices and have been discounted back to 2016 using the government’s approved discount rate for the student loan system of RPI+2.2%.
  6. To estimate the total cost of these reforms to government, we use internal Treasury estimates of the number of English-domiciled undergraduate students expected to start university in 2016–17 of 362,000. We fix growth in parental income to match the shares of students taking the full and partial maintenance grants in 2014–15 from the latest Student Loans Company estimates: that is, 55% receiving some maintenance grant and 41% receiving the full grant.
  7. To estimate the implications of the maintenance grant reform, we assume that maintenance grants and loans would have increased by 3% between 2015–16 and 2016–17 in the absence of this reform. To estimate the implications of the threshold freeze, we assume that the threshold above which repayments are made and the threshold above which students face the maximum interest rate are both frozen in nominal terms for five years and uprated in line with average earnings thereafter. Our assumed counterfactual is that both thresholds would otherwise have been increased in line with average earnings in all years.