Gradual reform of the English student loan system “impossible”

Reforming England’s student loan system is “essentially impossible” without hitting average earners harder than top-paid graduates, according to a respected research institute.

The change in loan terms is seen as a likely part of the Westminster government’s response to the Augar review of post-18 education funding in England, which is to be described as part of the comprehensive spending review next month.

In a briefing released on September 20, the Institute for Fiscal Studies (IFS) said that an overhaul of the lending system “now seems almost inevitable” as the Treasury seeks to reduce the costs of higher education. According to IFS’s own estimates, 44% of the value of student loans taken out by freshmen this fall will ultimately be paid by taxpayers, as under current terms, overdue balances are amortized after 30 years, and four out of five borrowers do not repay their debt in full.

However, the IFS, which created a calculator allowing users to examine the effects of changing any parameter of the lending system, argues that it is “essentially impossible for the Chancellor to save money without reaching more middle-income graduates than those with the highest incomes ”.

“Despite its many flaws, the current system has the desirable characteristic of being progressive: the highest paying borrowers by far repay the most for their student loans, and the lowest paying borrowers pay less,” the briefing states. IFS.

“Because the highest paying borrowers are already paying so much, any plausible way to raise more money from the system will shift the costs onto middle-income borrowers, but will largely spare those with the highest incomes. “

For example, the briefing states that increasing the student loan repayment rate “would be the easiest way to raise more money, but appears to be both politically unpleasant and economically ill-advised.”

“Counting both employer and employee contributions to national insurance and student loan repayments as taxes … the new tax on health care and social benefits goes into effect … This figure increases to 58% for those earning above the higher tax rate threshold (currently £ 50,270) and 64% for those who also have a postgraduate loan from the government, ”the briefing said.

A “more realistic” alternative, according to the briefing, is to extend the repayment term on student loans, potentially to 40 years, as the Augar review suggests.

However, he continues, “the borrowers most affected by this change would still be those with high but not very high lifetime incomes. The length of the loan does not matter for those with the lowest lifetime incomes, as most of them will not earn above the repayment threshold anyway and therefore will not make additional repayments. It also doesn’t affect the highest paying borrowers much, as most of them will pay off their loans in full in less than 30 years. “

Likewise, if the loan repayment threshold were lowered, the lowest paying borrowers would likely not be affected and the highest paid “would even end up paying less because they would pay off their loans faster and earn less interest.” .

A final option considered by the IFS is to reduce the interest rates on student loans. The briefing states that prior to the accounting changes introduced in 2019, “any interest accrued on student loans was recorded as a receipt in government accounts, while write-offs were only counted as expenses at the end of the term. of the loan “. Since then, however, “only the portion of student loans that the government expects to repay with interest is treated as a conventional loan; the remainder is considered an expense in the year the loans are issued.

“The higher the interest rate, the lower the share of loans that will be repaid with interest, and therefore the higher the amount of immediate expenses that counts for the deficit. Lower interest rates would still be a net negative for public finances in the long term, as the interest accrued on the portion of conventional loans would be lower, outweighing the reduction in expenditure when issuing loans. But the Chancellor is perhaps less concerned with the long term and more concerned with the next few years. “

Lower interest rates, according to the briefing, would be “a big gift for higher paying borrowers.” Nonetheless, he continues, “there is a strong case for lower rates regardless of any accounting considerations. With the current interest rates on student loans, many high-income graduates end up repaying both far more than they borrowed and far more than it cost the government to lend them.

Ben Waltmann, senior research economist at the IFS who created the loan calculator, said that with a series of adjustments to the loan system, “successive chancellors have gotten into a corner.

“The system is expensive, but there is essentially no way to make more money out of it without hitting borrowers with higher average incomes than those who earn the most. If he wants to collect more from the highest incomes, the Chancellor will have to use the tax system, ”said Waltmann.

Times Higher Education understands that there has been interest within government in proposals in a recent EDSK think tank report to “encourage students to seek out the courses and institutions that will offer them the most value” by lowering the threshold loan repayment from its current threshold of £ 27,295 in the new system and changing the repayment rate to 9%.

The EDSK report said there should be a “tiered” refund rate system: 0 percent for winnings up to £ 12,570; 3% for income between £ 12,570 and £ 17,570; 6% for income between £ 17,570 and £ 22,570; and 9 percent for winnings over £ 22,570.

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