Last week, we presented findings on the combined impact of the Augur recommendations. Although what we hadn’t previously modelled was the proposed repayment cap (recommendation 6.6), whereby no graduate should repay more than 1.2 times the initial amount borrowed (in real terms). Having modelled it now, it turns out it makes a big difference to the Exchequer and to graduates – probably more than was anticipated.
It also means that, if implemented, the winners and losers from the Augur Review would move around a bit…
What is the impact of the repayment cap?
There is some uncertainty about the interpretation of the cap applying ‘in real terms’. Here, we have assumed that the cumulative loan repayments per graduate – in constant prices – are capped at 1.2 times the initial total loan outlay per graduate. This has a big effect on the Exchequer costs of the system, and significantly benefits the highest earning graduates.
- Compared to the estimates excluding the cap, the total cost to the Exchequer per cohort including the cap stands at £9.08 billion (an increase of £0.58 billion per cohort). In other words, the inclusion of the repayment cap implies that the Augar recommendations are no longer cost-neutral.
- The write-off associated with maintenance loans increases by £0.24 billion, with a further £0.35 billion associated with tuition fee loan write-offs. This means handing back 18% of the public savings of £3.22 billion previously estimated.
- The introduction of the repayment cap results in the RAB charge increasing by 3.8 percentage points – to 34.8% – which significantly worsens the deficit.
- Average lifetime loan repayments for students undertaking full-time undergraduate degrees are estimated at £33,000 for men (a decline of £2,500 compared to the estimates without the cap), and £18,100 for women (a decline of £1,300).
- Under the current (2018-19) system of student contribution, the imposition of positive real interest rates results in a relatively progressive repayment system. Men on the 7th, 8th and 9th earnings deciles make lifetime repayments of around £60,000, while men on the 5th decile repay £43,800. At the lower end of the earnings distribution, the expected repayments made stand at £23,100 for males on the 3rd decile.
- However, following the changes to the graduate contribution system – particularly the reduction in the repayment threshold and the introduction of the repayment cap – the repayments made by the highest earners decline significantly. Men on the 7th, 8th and 9th earnings deciles make lifetime repayments of approximately £41,000 (a reduction of £19,000 to £20,000 compared to the current system).
- Men on the 5th decile see a small reduction in lifetime contribution – to £40,000 – but the repayment cap implies that the gap between the median male earner and the highest male earners has been eliminated.
- While women on the 9th decile of earnings also see a reduction in lifetime repayments, women between the 4th decile and 8th decile see significant increases in expected repayments. Affected by both the extension of the repayment period and the reduction in the repayment threshold, women on the 5th decile see their expected repayments increase from £6,900 to £14,000, while women on the 7th decile see their repayments increase from £25,700 to £38,500.
- As a result of the repayment cap, the outstanding loan balance (in cash terms) at the end of the repayment period was estimated to be £46,100 for men (an increase of £15,700 compared to the estimates without the cap) and £90,500 for women (an increase of £7,800).
|Resource flows||Augur recommendations||Augur recommendations||Difference|
|[no repayment cap]||[with repayment cap]||(£/pp)|
|Cost of maintenance grant||(£1,461m)||(£1,461m)||£0m|
|Cost of maintenance loan||(£1,511m)||(£1,747m)||(£236m)|
|Cost of tuition fee loan||(£2,467m)||(£2,815m)||(£348m)|
|Cost of Teaching Grants||(£3,060m)||(£3,060m)||£0m|
|Total Exchequer Cost||(£8,499m)||(£9,083m)||(£584m)|
|RAB Charge||31.00%||34.80%||3.8 pp|
|Students/Graduates (FT undergraduate degrees)|
|Average debt on graduation||£35,900||£35,900||-|
|Average Lifetime repayments (M)||£35,500||£33,000||-£2,500|
|Average Lifetime repayments (F)||£19,400||£18,100||-£1,300|
So now who are the winners and losers?
If all of the above recommendations – including the repayment cap – were to be implemented – the main winners are:
- High earning (predominantly male) graduates, who would repay less, and pay off the lower loans more quickly. These graduates are even better off now as a result of the repayment cap;
- Students from less well-off backgrounds receiving maintenance grants; and
- Higher education institutions offering a substantial component of high-cost Medicine, Dentistry and STEM subjects are winners – relatively speaking.
On the flip side, the main losers are:
- Graduates (predominantly female) with moderate earnings, who are likely to end up repaying more over the extended repayment period than is currently the case. The system would become less progressive as compared to the current system. The repayment cap positively impacts a small proportion of the highest paying female graduates, however, makes the system of contribution less progressive than what it would be without the cap (i.e. under all recommendations excluding the cap).
- Higher education institutions offering a substantial component of Arts, Humanities and Social Sciences degrees (especially those that are not perceived as high ‘value’ or high ‘priority’);
- Higher education institutions outside of England – and especially Wales (who face the unenviable position of English-domiciled students paying lower fees than their Welsh contemporaries);
- The Exchequer – compared to without the cap, the costs of the system have increased by approximately £0.58 billion a cohort as a result of the repayment cap – so the proposed system is no longer cost neutral. In addition, whereas the previous recommendations were slightly positive towards the deficit, this has changed. The repayment cap will add approximately £500 million per annum to the deficit in the first three years. There has also been a swing of £100 million – £200 million (from surplus to deficit) in many of the subsequent years (due to lower interest accrued on the loans expected to be repaid); and
- The Student Loans Company – who, still, may have to implement this.