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Lowering English loan repayment threshold ‘would save £4 billion’

Written by: Simon Baker
Published on: 17 Jun 2021

The 50th anniversary of the world’s first ATM is celebrated at Barclays Bank on June 27, 2017 in Enfield, England

Source: Getty

Lowering the threshold at which English graduates start repaying their student loans to the same level as before the tripling of tuition fees could save the government almost £4 billion for each cohort of students, a paper has suggested.

The option is put forward by the Higher Education Policy Institute as part of an assessment of ways that ministers could adjust the terms around student loans to make savings, published on 10 June.

According to the paper, by Hepi director Nick Hillman, although there are strong arguments that more should be spent on higher education given the “profound upheaval” caused by the pandemic, the indications are that the sector’s financial settlement for teaching may be squeezed in the spending review due later this year.

The paper, based on modelling by London Economics, identifies two approaches – lowering the salary threshold at which graduates begin to repay loans and lengthening the period before outstanding debt is written off – as saving money when looking at the current cohort of first-year undergraduates.

Extending the repayment period to 35 years from the current 30 would save the government just under £1 billion from the cohort and reduce the resource accounting and budgeting (RAB) charge – in essence the percentage of loan outlay that is never repaid – to 50 per cent from the current 54 per cent.

However, dropping the salary repayment threshold to £19,390, the level at which loans had to start being repaid before £9,000 fees were introduced in 2012, could cut the public cost of loans by almost £4 billion for one cohort and reduce the RAB charge to a third, “roughly the expected rate when the current system was introduced”.

The paper points out that such a change would result in many more graduates repaying some or all of their loan: the percentage forced to pay back at least some of their debt would rise from two-thirds to 84 per cent, while almost a quarter would repay the full amount, instead of 12 per cent with the current system.

Both male and female graduates would also repay an average of about £10,000 more under such a change, it adds.

Mr Hillman said that tweaks such as altering the salary threshold and the repayment period “might not be popular but they could deliver savings if policymakers are determined to find them”.

He said the alternatives, if ministers were set on finding public savings, were lowering the funding per student or capping places, moves that were “particularly unwise” given rising demand for education and the financial pressures universities were under.

“However, different changes [to the student loan terms] have different impacts on different groups, and we urge policymakers who want to save money by tweaking student loans to use the next few months wisely to ensure the impact is as fair as possible,” Mr Hillman added.

Jo Grady, general secretary of the University and College Union, said offering students “a choice between paying their loans back for longer or reducing the salary threshold at which they begin repaying them is no choice at all”.

“Both maintain the stranglehold of student debt, and lowering the threshold to £20,000 is particularly regressive, hitting the least affluent hardest. Ministers, and those in thinktanks, would do well to remember that even lower-earning graduates already spend most of their thirties and forties paying effective tax rates of over 40 per cent,” Dr Grady said.

“A threshold reduction to well below the average workers’ salary would make that a reality for many graduates fresh out of university, too, making it harder for them to plan and save for the future.”