Proposed Changes to Student Financing & How they could Affect Students & Graduates
Published June 2019
The long-awaited government-commissioned review of post-18 educational funding has now been published and it proposes some fairly radical changes to student financing. We look at the key points of the Augar report (the review panel was chaired by banker Philip Augur) and discuss how they could affect students and graduates.
Who will be Affected?
Current students and graduates will remain on the existing system.
The plans will apply to new starters (in England and Wales) from the 2021- 22 academic year. The one exception is a cap on repayments, which could be introduced earlier, bringing significant cost-savings for some graduates. However, given the current political chaos, it is impossible to say when or whether the plans will be implemented! (We will keep you posted.)
Change the language – no more ‘debt’
Measures to reduce student ‘debt’:
Cut tuition fees to £7,500 maximum
Reintroduce maintenance grants to replace maintenance loans
Changes to the repayment rules:
Lower repayment threshold to £23,000
Increase repayment period – loans written off after 40 years
Introduce a cap on repayments
Redirection of funding to boost Further Education and vocational training
Change the language: ‘student loans’ become ‘student contributions’
There will be no more talk of ‘loans’ and ‘debt’ – Augar recommends rebranding the financing as a ‘student contribution system’, in order to remove the negative psychological connotations, distinguish it from commercial loans and reflect the true nature of the system.
What does the name change mean?
Good news, at last! This is a welcome change, because the student ‘loan’ is not like normal debt – thanks to its delayed repayments, the write-off period, collection through the tax system, plus the fact that what you repay depends on what you earn rather than what you borrowed. (You currently repay 9% of everything you earn over £25,725, for a maximum of 30 years). In fact, student loans function less like a loan repayment and more like a long-term extra tax on income.
The psychological impact of communication should not be underestimated: the current ‘debt’ language is misleading and damaging for students and graduates, who start their working lives feeling they are saddled with a huge financial burden, which causes unnecessary stress and can impact their career and life decisions (job choices, whether or not to travel, or move back home etc.) Debt aversion also deters school leavers from going to university.
To avoid misunderstanding, it is also wise to make a clear distinction between the student ‘loan’ system and commercial loans, which are not income-contingent and require repayment in full, whatever your financial situation.
Measures to Reduce Student ‘Debt’ Levels
Cut tuition fees
The maximum undergraduate tuition fees universities can charge should be cut from £9,250 to £7,500 per year for the 2021/22 academic year, increasing in line with inflation from 2023/24.
To fill the funding gap, universities can then apply for Government grants for those degrees considered to be of ‘high value’ to the economy.
Replace maintenance loans with non-repayable maintenance grants of up to £3,000, for students from lower-income families (i.e. household income under £43,000). Grants would be available for both university and higher-level technical courses.
Maintenance grants were scrapped in 2016 and replaced with means-tested maintenance loans (based on family income). As a result, the poorest students have needed to borrow more to fund themselves through university, and are graduating with the largest debts, of over £57,000. Unless they become very high earners, they would probably not repay their huge loans, but nevertheless the psychological impact is significant.
In addition, it had been assumed that parents would plug the gap, funding the remaining living costs. However, the report showed that only 15% of parents provided at least the minimum expected contribution, sometimes because of affordability, but also due to lack of awareness of how the system was meant to work. As a result, living costs have caused ongoing problems for many students, so the proposal is to make this parental contribution explicit.
What would reinstating maintenance grants mean?
This will cut costs for lower-income groups and put an end to the scenario of the poorest students graduating with the highest debts.
Lower interest charges during study
A student loan accrues interest during university and after graduation, and the interest charged is linked to the rate of inflation RPI (Retail Price Index). The current interest rate during university study is RPI + 3% (= 6.3% for academic year 2018-19, and 5.4% for 2019-20). The recommendation is to cut this rate to equal the inflation rate (RPI).
What would cutting the interest rate mean?
It sounds like a fairer plan, but will have little real impact, because most people never repay all their interest charges anyway. A lower interest rate does not reduce your monthly repayments (which relate to your earnings), but it would reduce the overall amount you owe at graduation. In theory, that means you would clear your debt slightly sooner, but in reality, most students’ debts are wiped before they even repay the original value of their loan, never mind the interest added. So lower interest rates benefit only the highest earners, who will pay back their loan + interest.
What are the real effects of these debt reduction policies?
The cuts to tuition fees and interest rates, along with the return of maintenance grants, plus a cap on total costs all serve to reduce the amount of debt on graduation. The largest impact is for poorer students receiving the highest grants (trimming £20,000+ off their student debt). On average, the total sum owed after a 3 year degree would be around £35,000 under the proposed system, compared with today’s typical student debt of over £50,000.
Psychologically, less debt benefits everyone; however, reduced debt does not directly translate into reduced repayments for all graduates: student loan repayments are not based on how much you borrowed, but on how much you earn. So, a smaller debt only benefits the people who would repay all or most of it before it is wiped i.e. higher-earning graduates.
Changes to the Repayment Rules
The Augar review proposes changes to the loan repayment system, to help cover the increased government costs of maintenance grants and funding for university courses and further education.
Lower repayment threshold
The repayment threshold is the point at which people start paying back their student loan. Currently, graduates don’t have to begin repayments until they earn £25,725 a year, and they then repay 9% of everything they earn over this amount (for 30 years maximum). So a graduate earning £24,000 a year repays nothing and someone on £30,000 a year pays back £385.
The proposal is to lower this repayment threshold to £23,000 (to reflect average earnings). However, the threshold would rise with inflation each year, so by the time the plans are implemented, it might have risen again.
What would a reduced threshold mean?
All but the very lowest earners would feel the impact of this change: people will start repayments on lower earnings and repay a higher monthly amount (an increase of £15 per month, equivalent to £180 per year vs the current system).
Increase the loan repayment period
Under the current system, any unpaid student debts are written-off after 30 years, but the plan is to extend the repayment term to 40 years, meaning many people could still be paying back their student loans well into their 60s (close to retirement!)
What are the real effects of the new repayment model?
The changes will not make much difference to the lowest earners, who would still repay little, if anything.
Top earners will clear their debts anyway, albeit earlier than under the current system.
But middle-income graduates will feel the greatest impact: the combined effect of the lower payback threshold and extended payment period means many people will be repaying more money for considerably longer, significantly increasing their overall cost e.g. graduates earning around £45,000 5 years after graduation, would pay back about 105% of their original loan over 40 years, compared to 40% over 30 years under the current system.
However, the review does recommend a repayment cap to protect people from paying back far more than they borrowed, which can happen under the existing structure because of the rise in interest rates, and would be exacerbated by lengthening the repayment period. The Institute For Fiscal Studies (IFS) report that today’s ‘higher earners will pay interest of £40,000 on top of the amount they borrowed.’ Augar suggests that the repayment cap is implemented early to fix this problem for current students and graduates.
Introduce a total repayment cap
The recommendation is that nobody should ever repay more than 1.2 x the value of their original student loan, ine.g. for every £1000 of your loan, the most you would have to pay back is £1200 (in real terms).
What would the repayments cap mean?
In view of the proposed longer repayment period, this measure addresses the issue that middle earners could otherwise end up paying far more than the highest earners (who repay faster and therefore incur less interest). It also protects people lower down the income scale who might otherwise pay back significantly more than they borrowed, because they are clearing their loan slowly and racking up interest.
Redirection of government funding
The Government objective is to boost Further Education and vocational training, and target university funding towards high-cost and high priority courses e.g.
Since reduced tuition fees will necessitate additional government funding, they will shift support away from subjects regarded as ‘low value’ to the economy – where students are not earning enough 5 years after graduating to begin repaying their loans. This implies that degrees with a clear career path will receive greater funding than those with less obvious employment prospects and lower earnings potential (e.g. creative arts). The concern is that such a strategy could negatively impact student choices and learning experience.
The Augar review recommends radical changes to the current student financing system.
The measures to reduce the amount owed (through maintenance grants, repayment cap, cuts to fees and interest) plus the removal of ‘debt’ terminology, should bring huge psychological benefits for all concerned. But while all students would leave university with less ‘debt’, this does not lead to lower repayments for everyone; the proposed repayment model means the majority will face higher costs than before.
The new ‘student contribution system’ would still ensure that high earners pay back substantially more of the cost of their degree than lower earners (i.e. it is a ‘progressive’ system). But the overall package of changes benefits the highest-earning graduates most, whilst hitting middle earners hardest.
High earners will have reduced repayments: they are able to clear their debts comparatively quickly, and therefore incur less interest. The new policies mean they will have less debt and can repay it even faster. IFS estimate the highest earners could pay 30% less than before.
But for lower and middle earners, the changes mean significantly higher repayments: they will have to pay back more money for a far longer time, increasing their total costs by an estimated £15,000. Under the existing structure, repaying 9% of income above the current threshold, means all but the very highest earners will not clear their loans before the 30 year write-off; IFS report that 83% of graduates will never pay back the full amount they borrowed. But the new system – with its earlier start, longer repayment period and lower overall debt – ensures that roughly 50% of people would pay off their loans. The majority of graduates will have to get used to the fact that their income will be reduced by 9% for most of their working lives!
Find out more:
You can read the full Augar Review of Post-18 Education & Funding here.