The government have announced that tuition fees will rise with inflation each year from 2025/26. IF Researcher, Toby Whelton, explains what this will mean for incoming university students.
Tuition fees announced to rise
Last week, the government published its long-anticipated Post-16 Education and Skills White Paper. The headline announcement was confirmation that tuition fees will continue to rise with inflation each year until the end of the parliament.
Tuition fees for this year’s cohort are £9,535. Next year is estimated to be £9,935, and by 2029/30 current forecasts would mean tuition fees rise to £10,860 a year.
Universities’ ability to raise fees will be conditional on meeting certain quality standards, as determined by the Office for Students. Specific details are yet to be released, but it is likely that most institutions will be eligible, hence the majority of students will be affected.
In 2023, Bridget Philipson pledged that graduates “will pay less under Labour”. So much for that…
What will this mean for graduates?
The actual impact of higher fees is not immediately obvious, given the complexities of student finance.
Many are quick to point out that higher tuition fees will not affect graduates’ monthly repayments. Monthly repayments are determined by the repayment threshold (the income beyond which you begin repaying) and the repayment rate (the percentage of your income above the threshold you repay), currently set at 9%. The outstanding loan balance does not affect this. For example, you could owe a million and monthly repayments would remain the same. This is why some believe student loans are better considered as an effective graduate tax, not a debt.
However, this view is now largely outdated. It was true that for Plan 2 (loans that apply for university starters between 2012–2022) the majority of graduates will not repay their loan in full. However, those who will be affected by the fee rise are on Plan 5, which extended the loan term from 30 to 40 years, reduced the repayment threshold and lowered interest rates. This means a far greater proportion of students are expected to repay their loans in full.
For those who repay their loan in full, the headline tuition fee matters. It determines how long graduates are locked into the student loan system and the total they repay across their lifetime.
Who will pay off their loan?
To work out the impact of the tuition fee rise, we need to know how many will repay their loan in full. This is a near-impossible task as it involves forecasting the earnings of hundreds of thousands of students decades into the future. If predictions of earnings growth are off by just a few decimal points, this can impact forecasts by billions.
The Department of Education’s own modeling expects 56% of university starters to repay their loan in full, still a majority. However, this estimate is likely on the lower side. DfE’s earning projections are particularly pessimistic as they prioritise post-2008 data, a period of historically low income growth. Many economists believe this has been an anomaly and it is likely that earnings growth trends upwards towards the historical norm in the decades to come.
This is the view taken in other models. London Economics’ forecasting model projects 70% of graduates in the current cohort will fully repay their loans. Meanwhile, the Institute for Fiscal Studies (IFS) estimate 82% will repay in full. These estimates would mean the vast majority of graduates are affected by the fee change, even many graduates who go on to have below-average lifetime earnings.
What will the cost of the fee rise be for graduates?
At first glance, the fee rise may seem modest relative to the total debt taken on by students, but once we account for the compounding interest, this is not necessarily the case.
DfE predicts that the median graduate will have fully repaid their loan in 31 years. The portion of the repayment that represents the tuition fee rise would effectively be paid at the end of this period.
For students starting in 2029/30, the extra £5,705 borrowed because of higher tuition fees will grow to around £14,000 once interest is added over thirty years. Our modelling predicts this would extend the average graduate’s repayment period by almost three years.
Burdening younger generations
If we extrapolate this across all those who will begin university in this parliamentary term, the numbers become staggering. Using DfE’s assumptions, these cohorts will make an additional £13.3 billion in lifetime repayments as a result of the tuition fee rise. If we use IFS projections, this number becomes £15.4 billion.
This is a huge burden to add to younger generations, one that does not have democratic consent. Total student debt currently stands at £270 billion. We owe it to young and future generations not to add to this on a whim, in a time when many graduates are facing precarious employment, sky-high rents, and the withdrawal of the welfare safety net.
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