Student Finance Reform Only Benefits the Highest Earning Graduates

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.

The IFS was asked by Universities UK (representing Universities) to explore options for reforming the student loan system and they have now published their findings in a briefing note entitled “Options for reducing the interest rate and reintroducing maintenance grants”.

In the briefing note two options for reform to aspects of the student loan system that have been widely discussed are reviewed. 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:

• Reintroducing grants of £3,500 would increase deficit spending by around £1.7 billion, but the long-run cost is only around £350 million. This reform would reduce the debt on graduation of students from low-income backgrounds taking a three-year degree by around £11,000.
• Reducing the interest rate doesn’t impact on up front government spending, but it does increase the long run cost of the system. 
• 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”

Commenting on the analysis, Alistair Jarvis, Chief Executive of Universities UK, said: "We agree with the IFS that there are ways the government could improve the current student funding system in England. While the current system has provided sustainable funding and promotes access, it needs to be better understood and needs to feel fairer to our students and their families. This analysis from the IFS provides a useful contribution to the ongoing debate.

"Students tell us that it is cash in their pockets while studying that matters most. We would like to see the government provide new investment to bring back maintenance grants aimed directly at those students who find it hardest to meet day-to-day living costs when they are studying. We also need to boost flexible learning through more government support for adults to retrain or improve their skills."