Researchers spot ‘massive retrospective change’ on student loans

Threshold indexing change, not mentioned by DfE in media briefings, brings lifetime hit of up to £19,000 for ‘lower middling earners’ who took out loans after 2012

March 2, 2022

The Westminster government has delivered a “massive retrospective change” in English student loans hitting existing borrowers, in particular “lower middling earners”, for up to £19,000 over their lifetimes, according to a respected economic thinktank – a change the government failed to mention in its briefings for coverage of loan changes last week.

The government directed attention to changes hitting future borrowers starting courses from September 2023 in its announcement on 24 February: lowering the loan repayment threshold to £25,000 from just over £27,000 (the threshold will be frozen until 2026-27, but changes will come into effect for graduates from then onwards), the repayment term extended to 40 years from 30 years, and interest rates lowered so loan balances increase only with the retail price index (RPI) measure of inflation. The changes will benefit the highest earners, with most others worse off.

But analysts at the Institute for Fiscal Studies said on 2 March that they had spotted in supporting documents a “crucial tweak” that will hit existing borrowers who have taken out loans since fees trebled in 2012. The Department for Education did not mention this change in repayment threshold indexing in its press release or its media explainer on the changes last week.

The IFS said on its analysis, carried out by Ben Waltmann: “After being frozen until the 2026-27 fiscal year, the student loan repayment threshold will in the future be indexed to RPI inflation instead of average earnings. Because of RPI reform, RPI will be the same as CPIH from 2030. According to the latest OBR forecasts, this means that from 2030, the repayment threshold will rise by ~1.7 percentage points less every year than it otherwise would have done.”

This means that for future borrowers, “those in the third and fourth earnings decile will be paying £28,000 more towards their student loan over their lifetime, rather than £15,000 and £19,000 as we originally said”, the IFS said.

And on existing borrowers, the government has delivered “a massive retrospective change in repayment conditions that will hit lower middling earners the most”, the IFS added.

“We estimate that the lifetime hit from changes announced this year for 2022 starters who go on to have lower middling earners will be £19,000 (undiscounted CPI real terms), and nearly as much for earlier cohorts,” it said.

Taking the repayment threshold indexing into account, the government “will save substantially more for the taxpayer than we previously thought”, the IFS continued. “We now think the net long-run saving on loans will be £2.3 billion per cohort rather than £1 billion (undiscounted RPI real terms).”

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