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IFS issue their verdict on latest reforms

New analysis from the Institute for Fiscal Studies examines the changes to the student funding system announced in the July Budget.
This article is more than 8 years old

Emily Lupton graduated from the University of Lincoln in 2014 with a degree in Journalism. She worked for Wonkhe as Graduate Editor for a year before moving onto other journalistic pursuits.

The poorest 40% of students will graduate with £53,000 of debt and graduate repayments will increase by £3,800 per student according to analysis from the Institute for Fiscal Studies (IFS).

A new briefing note published by the IFS, Analysis of the higher education funding reforms, examines changes to higher education funding and student support announced in the July Budget.

Replacement of maintenance grants with maintenance loans

Students from low-income households may have up to £550 extra ‘cash in pocket’ per year with the new maintenance loans (IFS estimates). But the poorest 40% of students will suffer a substantial increase in debt, rising from around £40,500 to £53,000 says the briefing note.

Around 26% of the value of these additional loans is expected to be repaid, with higher loan repayments of around £600 million per cohort. 35% of those eligible for full maintenance grant are expected to pay back more than they would without the reform. Their repayments will continue for an extra four years and average individual will contribute an extra £9,000 towards the cost of their degree in 2016 money.

Overall, IFS estimates upfront student support will increase by around £340 million per cohort with spending on students loans increasing by £2.3 billion and spending on student grants declining by £2 billion for a cohort of 362,000 students.

Current spending on loans doesn’t impact borrowing until debt is written off, an advantage for the government in this case. But while borrowing will fall by an estimated £2 billion per year in the short term, it will cause higher borrowing 30 years into the future. “The total long-run effect on borrowing taking this into account is to reduce it by just £270 million.”

Freezing the repayment threshold

Freezing the repayment threshold at £21,000 in 2016 prices will bring it’s value down “close to the value of the pre-2012 threshold of £15,000 in real terms” according to the briefing. IFS assumes that the higher income threshold (currently £41,000 in 2016 prices) is also frozen for five years.

Loan repayments would increase annually and in total under these reforms. Total repayments will increase by around £3,800 (on average in 2016 money) where income thresholds rise in line with average earnings each year. IFS estimates a £1.4 billion reduction per cohort of the long-run cost to government of funding undergraduate higher education.

Middle-income graduates would be hit hardest; “we estimate that a graduate on median earnings would repay £6,000 more in total in 2016 money than under the 2016–17 system with maintenance grants replaced by loans.”

Increasing the fee cap in line with inflation

“The implications of this policy will depend on which universities are allowed to raise fees and on the income of their graduates” says the briefing, noting that the policy is likely to increase the cost to government of teaching undergraduates as fee loans would rise and not all are repaid in full.

Assuming all institutions uprate their fees with inflation, average debt per student would rise by around £1,000 and upfront government spending would rise by around £300 million with less than one-third of that cost expected to be repaid.

Looking at these three policies together, implemented in 2016-17, IFS estimate that “graduates would, on average, contribute an extra £6,000 to the cost of their education (compared with the baseline system), with the long-run cost to government estimated to fall by around £1.4 billion per year in today’s money.”

The briefing note also examines the proposal to reduce the discount rate, calling it essentially an accounting ‘trick’ as it neither changes the real resources going to students or universities nor increases repayments from graduates. It would only mean that “future repayments will be valued more highly today, “making it appear that the cost of the system (in net-present-value-terms) is lower than it was before.”

Finally the briefing note considers the effect on participation. IFS would expect negative impacts on participation for the poorest students once maintenance grants are abolished, and stronger potential negative effects on participation if the income threshold is frozen and fees are introduced. “Only time will tell” what the impact will be for students from the poorest backgrounds says the report, “but there are reasons to believe that the effects may not be as benign as they appeared to be following the 2012 reforms.”

The executive summary of this briefing note points out that only the first of these reforms will definitely go ahead; “The government will consult on the changes to the income threshold and the tuition fee cap, and the Treasury will review the change to the discount rate.”

Find the report in full here.

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