Cutting student loan interest would ‘benefit high-earning most’

IFS analysis says bringing back maintenance grants would also lead to little or no change for lowest-earning graduates across their lifetime 

November 17, 2017
Student loan

The reintroduction of maintenance grants and the reduction of student loan interest rates in England would reduce the repayments of the highest-earning graduates only, an analysis has estimated.

These are both options that have been widely debated in the wake of Theresa May’s recent announcement of an inquiry into the student loan system.

According to the Institute for Fiscal Studies, the lowest-earning 70 per cent of graduates would be “completely unaffected” if the interest rate on student loans was changed to retail price index plus 0 per cent for all graduates. It is currently at RPI plus 3 per cent while studying and RPI plus 0 to 3 per cent (depending on income) after leaving university.

The IFS estimates that the richest 20 per cent of graduates would hold about £20,000 less debt at age 40 as a result of this policy change, while the lowest-earning 20 per cent would be just £5,500 better off.

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, it says.

It adds that such a reduction would not impact up-front government spending but the long-run cost would be £1.3 billion per year. This compares with the IFS’ £2.3 billion estimated long-run cost associated with increasing the repayment threshold from £21,000 to £25,000.

The analysis comes in a briefing note from the IFS published on 17 November, which was funded by Universities UK.

The note adds that the reintroduction of maintenance grants would only reduce the repayments of graduates who grew up in low-income households and who go on to have high earnings, because only the highest-earning graduates end up repaying the additional maintenance loans under the current system.

It estimates that the reform would reduce the debt on graduation for students from low-income backgrounds taking a three-year degree by about £11,000.

But students eligible for the full maintenance grant who are in the lowest-earning 60 per cent of graduates would experience “little or no change in lifetime repayments”, while those who have earnings in the top 10 per cent of graduates would save about £22,000.

The IFS also estimates that bringing back grants of £3,500 under a similar system to that before 2016 would increase deficit spending by about £1.7 billion per year, but the long-run cost would only be about £350 million a year. This is because a high proportion of the additional maintenance loans given to students from low-income backgrounds are not repaid anyway.

“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,” said Chris Belfield, research economist at the IFS and co-author of the briefing note.

“However, these policies would increase the long-run cost to government and predominantly benefit high-earning graduates.”

Alistair Jarvis, UUK’s chief executive, described the IFS paper as “a useful contribution to the ongoing debate”.

“Students tell us that it is cash in their pockets while studying that matters most,” he said. “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.”

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