The graduate repayment burden is growing and becoming more regressive. Here’s how to fix that

There is an annual conversation about higher education – about who goes, how much it costs, and how we think about value; for the taxpayer, the student, and the wider economy.

A level results day prompts all kinds of commentators to dig deep into their memories of their own university experience and saddle up whichever policy hobby horse they wish to ride. It’s a lot of noise – the one week in the year that you can confidently expect to see universities on the front page of broadsheet newspapers – but the quality of these interventions is variable at best.

Conversely the latest report from the Intergenerational Foundation – as covered on Monday morning in the Guardian – is genuinely excellent, and it is worth deep engagement from the kinds of people who think about higher education policy during the other 51 weeks of the year.

The thesis of Repayment Repression is that we are looking at higher education finance through the wrong lens. The significant underlying story for the last 20 years has been the “gradual withdrawal of the state’s contribution to higher education” – and it is this post 2012 strategic trend, rather than the initial move to the 2012 model, that has left university finance, student support, and graduate burden in the states we currently find them in.

Including Theresa May’s raising of the repayment threshold in 2018 at a cost to the exchequer of around two to three billion, the changes made to the student finance model since 2015 have added around £14,360 to the repayments of the average (median) earning graduate. The switch from plan 1 to the original plan 2 terms (based on a counterfactual in which the plan 1 system remained in place) added just over five thousand pounds to the expected lifetime repayment on average.

The majority of these changes – 2016’s abolition of maintenance grants and threshold freeze, the 2022 threshold freeze and the move from earnings to RPI as an uprating mechanism, and the threshold freeze at the last budget, have been regressive. These decisions have increased the burden on the median earner in order to reduce the burden on higher earners. The switch from plan 2 to plan 5 exacerbated this trend – the average graduate earner in the 2023-24 cohort is likely to be £16,000 worse off than in the counterfactual, while better off graduates would be £16,000 better off.

As the report puts it:

Higher earners are expected to be largely unaffected because they would already have been likely to clear their debt within the original 30-year term. Indeed, the lower repayment threshold will enable higher earners to clear their debt earlier. By contrast, average earners who would previously have benefited from a partial loan write-off are now expected to repay their loans in full.

Given the technocratic nature of these changes to repayments, and absence of meaningful parliamentary scrutiny of changes (even affirmative instruments get, at best, a brief discussion about good drafting practice in a legislative scrutiny committee) we have a system that has not been “designed” in any meaningful sense. Rather, it is the accretion of a series of short term decisions to minimise exchequer outlay to fund other priorities.

This is why the total state subsidy per undergraduate (fee subsidy, maintenance subsidy, and additional teaching grants) has fallen from £26,600 in 2015-16 to £17,350 for the last plan 2 cohort – and to just £4,200 (equivalent to 8 per cent of the total cost of higher education) for plan 5. We can’t blame David Willetts for that.

I should add, as the report does, that all of these figures are based on standard DfE assumptions, and the usual caveats around predicting future earnings and repayments of graduates are (as John Burn-Murdoch pointed out last week in the Financial Times) more closely aligned to the state of the wider economy to any changes in the “value” of higher education.

The national conversation about the sector this week will, as usual, be predicated on concerns around quality and value. I’m not enough of a pollyanna to suggest that these concerns are not valid – and we should welcome the positive action via DfE and OfS to limit the growth of franchise and partnership delivery that has often appeared to happen without regulatory or academic oversight – but the framing rather misses the point.

Higher education is expensive – and, to most graduates, there is both a lifetime and a medium term earnings benefit to a degree or postgraduate qualification. However, these benefits – especially the more marginal earnings benefits experienced in precarious or public sector parts of the economy – have been eaten away by successive Treasury-led decisions to return them to the public purse.

The Intergenerational Foundation recommends a series of policy measures to reverse some of the more rapacious decisions, with the headlines being a reduction in the repayment rate for all (plan 2 and plan 5) graduates from 9 per cent to 5 per cent, a shift to calculating repayments net of pension contributions (as is standard for tax and NI calculations), and the restoration of 2016-style maintenance grants for students from poorer backgrounds.

The 5 per cent contribution rate would raise state subsidy per graduate to 26 per cent of total government outlay. Invested in a lifetime ISA the savings made by the typical graduate by the restoration of this level of subsidy would be equivalent to an extra £16,500 within the first 15 years of graduation.

There’s a more detailed accounting treatment of the exchequer costs – based on the reduction of the repayment rate by 1 percentage point each year from now to 2030 – in an annex: the cost for the last plan 2 cohort would be £5.5bn, for all 11 plan 2 cohorts would be £50bn, for existing plan 5 cohorts would be £5.5bn, and for each new plan 5 cohort would be £1.8bn. Spreading the £50bn cost for the entire of plan 2 over four years by a scaled reduction of the graduate contribution rate works out at £12bn a year.

It is expensive medicine – but it is the most effective means of spending this money in a way that directly, tangibly, and progressively has an impact on graduates.