Stepped loan repayments mooted as students bear cost of changes

A stepped repayment system has been proposed for English student loans after new analysis showed changes to terms by successive governments mean the Treasury will generate £679 million in surplus from the 2022-23 cohort of undergraduates.

Research by consultancy London Economics has found the changes made by both Conservative and Labour governments since early 2022 will significantly benefit the public purse, while graduates may be left paying thousands of pounds more – shifting the cost of education entirely on to the student.

The analysis looks at the 2022-23 cohort of undergraduate entrants in England – the final group of students to take out the controversial Plan 2 loans. 

It shows that, by 2032, graduates earning £40,000 or above a year will be expected to repay £740 more in that year than under the original Plan 2 terms that were in place less than a year before they started their studies.

Graduates with Plan 2 loans pay back 9 per cent of their earnings over a certain threshold, which was recently frozen by the Labour government until 2030. 

This move will reduce the cost of student loans to the Treasury by £1.3 billion for the 2022-23 cohort, the analysis shows, but Gavan Conlon, partner at London Economics, said that while much media attention has been focused on the Labour threshold freeze, “this is not the main source of concern”. 

“In reality, the changes that were made in 2022 following the Augar Review are much more consequential than the recent ones. These changes account for approximately £4.6 billion of additional costs for graduates, compared to £1.3 billion relating to the recent freeze,” he said.

In 2022, the repayment threshold was frozen at £27,295 and remained at that level until the chancellor’s recent changes, when Rachel Reeves announced the threshold would increase to £29,385 and be frozen at that level from 2027. The former Conservative government also changed the annual uprating mechanism for the thresholds from average earnings growth to RPI inflation, baking in lower increases for the long term.

As a result of the combined changes to the Plan 2 system, male graduates will pay on average an extra £13,400 over their lifetimes compared with the original terms, and female graduates will pay an extra £16,900. The research also found that lower- and middle-income earners have been much more adversely affected than higher earners.

Conlon added: “The retrospective changes to Plan 2 loans now result in graduates bearing the entire cost of higher education, compared to approximately 40 per cent back when Plan 2 loans were introduced.” Under the original system the cost to the Treasury was £5.2 billion.

In response to the findings, the National Union of Students (NUS) and the Higher Education Policy Institute (Hepi) have published an alternative stepped repayment model for student loans, which they say would be cost neutral to the Treasury.

Instead of the flat 9 per cent repayment rate, the organisations suggest repayment rates of 3 per cent on earnings between £12,570 and £27,570; 5 per cent between £27,571 and £42,570; 7 per cent between £42,571 and £57,570; and reverting back down to 3 per cent above £57,571. 

Income-contingent interest rates would start at £12,570, increasing to the maximum of 3 per cent plus RPI at £42,570. 

The organisations said these changes would make the system more progressive than the current Plan 2 terms. Conlon added that the proposed changes could “ease the affordability concerns of graduates” by lowering payroll deductions for many. Graduates will also end up paying slightly less on average over the course of a 30-year repayment window.

The government has said it is looking at making the system fairer and the Treasury Committee recently launched a new inquiry into student loans and the broader taxation of graduates.

“This Labour government now face a choice, whether to keep meddling with a broken system or choose to back the young people who are trying to build their futures,” said NUS president Amira Campbell. 

“We hope this government, who once spoke of free tuition, will at least try to do the right thing and bring about fundamental reform of this broken student loan system.

“This is now a question of trust. Can we trust our government to make decisions in our best interest? Or will they break that trust and keep profiting from our debt?”

helen.packer@timeshighereducation.com