July Budget 2015: changes to student loans will hit middle-income graduates, says IFS

David Kingman looks at the changes to the system of student loans that were announced in the July 2015 Budget, and how – as the Institute for Fiscal Studies argues – these will have a negative impact on middle-income graduatesIf_Blog_Mortar-Board-Coins-300x199

Middle-income graduates will lose out the most from the changes to higher education financing that were announced in the July 2015 Budget, according to new research from the Institute for Fiscal Studies (IFS). What does this mean for the next generation of students?

Grants to loans

The Budget included two particularly significant changes to higher education funding which interrelate with each other. Firstly, maintenance grants – the means-tested payments which were designed to make it easier for students from poorer backgrounds to support themselves at university – are to be scrapped and replaced with an expanded system of maintenance loans. Previously, the poorest 40% of students attending university in England were able to claim up to £3,500 as a grant that didn’t need to be repaid, whereas this system will now be replaced with an extra loan that will be worth up to £550 a year more.

The IFS estimates that the impact of this reform will be to create a system under which the typical student who is among the poorest 40% will graduate with much higher average levels of debt: £53,000 from a three-year course, rather than up to £40,500. Therefore, the IFS argues, students from the poorest backgrounds (the threshold for receiving these loans is coming from a household where parental pre-tax income is below £25,000 per year) will have a little more money to live on while they are at university, but will graduate with significantly higher debts than their better-off student colleagues.

The government’s main motive for implementing this reform appears to be that it will reduce the borrowing figure in the national accounts by around £2 billion per year, as – for accounting purposes – loans are classed as an asset rather than liability. However, their modelling suggests that only around a quarter of these loans will actually be repaid, as students who come from poorer backgrounds tend to earn less throughout their careers than their wealthier counterparts do; hence, as these loans are income-contingent, they will pay back less.

Two-thirds of the people who are eligible for the higher loans are expected to pay back no more on average, but the remaining third will see their repayment period extended by a further four years compared to what it would have been previously, with average additional repayments being worth around £9,000 in 2016 money. The net impact will be to reduce the government’s total contribution towards higher education by around 3% – a cost that will now essentially fall onto the heads of graduates.

Stiffer repayment terms

The impact of the switch from grants to higher loans will be compounded by a second reform which the Chancellor announced in his Budget speech: freezing the repayment threshold at £21,000 for five years.

While this is still only an idea which is being consulted on, the IFS estimates that this would be likely to increase graduate repayments by an average of £3,800, but for a middle-income graduate – who earns too much to fall below the repayment threshold, but not enough that their debt gets repaid very rapidly – the additional repayments will amount to around £6,000 in 2016 money. In the long run, this change would probably save the government about £1.4 billion per cohort of students, according to the IFS calculations.

It seems that what these changes would amount to would be a further significant transfer of the responsibility for funding higher education away from the government and towards the individual, with a growing burden being placed on the shoulders of graduates who originally came from poorer backgrounds and/or who are middle-income earners during their careers.

Will this have an impact on the likelihood of lower-income students attending university? The government is clearly taking a gamble that it might, according to IFS Research Economist Jack Britton:

“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.