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Student finance reforms which reduce graduate debt levels typically benefit high earning graduates the most

Chris Belfield, Jack Britton and Louis Hodge
Press release

In October, alongside a significant change to the threshold at which student loans are repaid, the Prime Minister Theresa May announced an inquiry into the student loan system.

In a new IFS Briefing Note, we explore two other options for reform to aspects of the student loan system that have been widely discussed. The first is the high interest rates assigned to student debt - currently RPI + 3% while studying and RPI + 0-3%, depending on income, after leaving university. The second is the fact that - following the abolition of maintenance grants in 2016 - those from the poorest backgrounds currently graduate with the largest debts.

Key findings:

  • Reducing the interest rate doesn’t impact up front government spend, but it does increase the long run cost of the system. The long run cost of switching to RPI + 0% would be £1.3 billion per year. This compares to the £2.3 billion estimated long run cost associated with increasing the repayment threshold from £21,000 to £25,000.
  • Reducing interest rates only reduces the repayments of the highest earning graduates. This is because only high earning graduates end up repaying the interest on their loans. For most graduates this is written off at the end of the repayment period. The lowest earning 70% of graduates would be completely unaffected by changing the interest rate to RPI + 0% for all graduates.
  • Despite having no impact on upfront spending, reintroducing maintenance grants would increase the deficit. Grants count towards the deficit and loans do not, even if they are not expected to be repaid. Bringing back grants similar to those in place before 2016 grants would add around £1.7 billion to the deficit per year.
  • The long run cost of bringing back grants would be considerably lower, however. This is because a high proportion of the additional maintenance loans given to students from low-income backgrounds are not repaid anyway. The long-run cost of bringing back the pre-2016 style grants would be around £350 million a year.
  • Reintroducing maintenance grants only reduces the repayments of graduates who grew up in low-income households who go on to have high earnings. Only the highest-earning graduates end up paying of the additional maintenance loans under the current system. The majority of those eligible for the full maintenance grant would see no change to their lifetime repayments, while those who go on to high earnings could save around £22,000 over their lifetimes.

Chris Belfield, an author of the report, said:

“Some of the features of the current student loan system are clearly deeply unpopular. Bringing back maintenance grants or reducing the positive real interest rate might help to address these concerns. However, these policies would increase the long-run cost to government and predominantly benefit high-earning graduates”

Notes to Editors:

The briefing note entitled “Options for reducing the interest rate and reintroducing maintenance grants” by Chris Belfield (Research Economist at IFS), Dr Jack Britton (Senior Research Economist at IFS), and Louis Hodge (Research Assistant) was published on Thursday 16 November 2017.

This research was funded by Universities UK. Universities UK is the representative organisation for the UK's universities. Founded in 1918, its mission is to be the definitive voice for all universities in the UK, providing high quality leadership and support to its members to promote a successful and diverse higher education sector. With 136 members and offices in London, Cardiff (Universities Wales) and Edinburgh (Universities Scotland), it promotes the strength and success of UK universities nationally and internationally. Visit:

The authors would like to thank the Department for Education for providing the linked NPD–HESA data.

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 January 2017 Fiscal Sustainability Report and the March 2017 Economic and Fiscal Outlook. We assume no dropouts and 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). Students repay 9% of their income above a threshold which increases with average earnings growth from 2021. Any debt left outstanding 30 years after graduation is written off. Therefore, if a graduate has not finished repaying the principal value of their loan after 30 years, all the interest accrued is written off and the graduate is unaffected by the interest rate charged.

Unless stated otherwise all figures are in 2017 prices. Government cost figures have been discounted back to 2017 using the government’s discount rate for the student loan system of RPI+0.7%. Student cost figures have not been discounted, but are deflated back to 2017 prices using CPI inflation.

To estimate the total cost of the system to government, we use 2015–16 HESA statistics on the number of English-domiciled full-time undergraduate students that started university in 2015–16.

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Briefing note
In October, the Prime Minister called for an inquiry into the student loan system for higher education (HE). In this briefing note, we focus on two of the more unpopular features of the current system. We explore government options for reducing the interest rates charged on student loans, from the ...