The Government plans to publish a conclusion to its review of post-18 education and funding in autumn 2021. It’s widely expected it will propose the largest changes to student finance since 2012.
Under the current undergraduate student loans system, borrowers repay 9% of their earnings above the £27, 295 repayment threshold. Any debt remaining after 30 years is written off.
In this Insight we look at the hypothetical effects of extending the loan term to 35 years and increasing the repayment rate to 10%. We find that both measures result in increased lifetime repayments especially from middle to higher earners.
The longer loan term could cut the cost of loans to the taxpayer by £1.5 billion. The higher repayment rate could cut the cost by £0.7 billion.
The independent Augar Review recommended in 2019 that the loan term should be extended to 40 years. It made no recommendation on changing the repayment rate.
Middle-higher earners would repay more under both changes
Extending the loan term to 35 years
If the repayment time for loans was extended from 30 to 35 years, the average repayment per borrower would increase by £3,800 or 13.0%.
Middle to higher earners (income deciles 7 and 8 in the chart below) would see the largest absolute increase of around £7,800 on average. The most affected would be those who haven’t repaid their loan after 30 years but are still earning well over the threshold. They are likely to make substantial additional payments over the extra five years of the loan term.
Those in decile 6 would have the largest percentage increase at 20%.
The number of borrowers who repay their loan in full would increase from 22% under the current system to 28%.
Extending the loan term has no impact on those who would have repaid their loan in full within 30 years. Most of whom are in the top two earnings deciles. It also has little or no impact on the lowest earners who do not earn enough to make substantial repayments, even after 30 years.
The Resource Accounting and Budgeting (RAB) charge would also be affected. This is the difference between the amount lent to a cohort of students, and the present value of their repayments as graduates. The Institute for Fiscal Studies (IFS) forecasts that this will be 44% under the current system.
By extending the repayment term to 35 years, graduates would pay back more and the RAB would reduce to 37%. This would mean the overall cost of loans to the taxpayer falls by £1.5 billion.
The charts below summarise the effect of this change based on earnings deciles of borrowers and overall financial flows. The data is from the IFS’s Student finance calculator. All figures are shown in present value terms. This adjusts future repayments for inflation and the Government’s cost of borrowing to give their value to the Government at the present time.
Increasing the repayment rate to 10%
In this scenario, the IFS forecasts that the overall cost of loans to the taxpayer falls by £0.7bn. This is because the RAB charge would fall from 44% to 41%.
The average repayment per borrower would increase by £1,600 or 5.5%.
Middle to higher earners (deciles 6-8) would again see the largest absolute increase of around £3,000 on average. They earn enough to see their monthly repayments increase, but generally not enough to repay early.
Those in the lowest earning decile would see the largest percentage increase, but their absolute increase would be well below average at around £200. Those who earn (just) enough to make some repayments would have them increased. The relative increase in repayments is similar for deciles 2-6 at around 10%.
The number of borrowers who repay their loan in full would increase from 22% under the current system to 26%.
Increasing the repayment rate would mean that everyone repaying under the current system makes higher monthly repayments. This means the highest earners repay their loan quicker, pay less interest and therefore their lifetime repayments fall.
Timing of extra repayments
Extending the loan term to 35 years has no impact on repayments over the first 30 years. It only increases repayments after 30 years, as shown in the chart below. Most borrowers who are still repaying after 30 years will therefore make extra repayments in their early to mid-50s.
Increasing the repayment rate to 10% simply multiplies the total value of repayments for the first two decades of the loan term (shown in the next chart).
After these two decades, the additional monthly repayments from those still in debt is balanced out by lower repayments from higher earning borrowers, specifically those who would have repaid their loan earlier and so stopped repayments sooner than under the current system.
Most high earners who see the benefit of this change would be in their 40s. Those who repay more would do so throughout their working lives until their loan is written off.
How does the impact vary between men and women?
Extending the loan term has the greatest impact on middle to higher earners, who are mostly men. Overall, male borrowers would have an average increase in repayments of £4,900 (11.6%) compared to £3,000 (15.6%) for female borrowers.
If the repayment rate was raised to 10%, increases in repayment are similar in absolute terms for men and women at £1,800 and £1,400 respectively.
The relative increase among women is larger (from 4.3% to 7.35) as average repayments in the current system for women are less than half of those for men.
Other articles in the series
Read our introduction to student finance in England for important background on student finance.
How much do graduates pay back? also gives more detail on current financial transactions and repayments from graduates.
The rest of the series looks at:
- The impact of increasing the loan interest rate
- Impact of lowering the repayment threshold
- Impact of reducing the fee cap
- Extending the loan term and increasing the repayment rates
- How much would it cost to bring back grants?
About the author: Paul Bolton is a statistician at the House of Commons Library, specialising in higher education.