|Date:||17 November 2017|
|Authors:||Chris Belfield , Jack Britton and Louis Hodge|
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.
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: www.universitiesuk.ac.uk
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.