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.
This Insight looks at how graduates (borrowers) pay back their undergraduate loans and how it differs depending on their earnings. It’s part of a series looking at the student finance system in England and the impact of possible changes.
Who pays and how much?
Loan repayments are just one part of the student finance system.
The main transactions, including taxpayer funding to universities and publicly funded student loans, are summarised in the chart below. It shows how much the taxpayer lent to students and paid universities in 2020/21, and how much students paid in fees and graduates are expected to repay.
The total lending figure includes maintenance loans, but not other sources of maintenance support such funding from parents.
It also includes the ‘RAB charge’ of the current system and uses this to calculate the total cost of loans to the taxpayer. The RAB charge is the difference between the amount lent to a cohort of students, and the value of their repayments as graduates. For 2020/21 it is predicted by the Government to be 53%.
How do repayments vary?
How much borrowers repay depends on the amount they earn after leaving education and the amount they borrowed to study. Those who earn less will pay back less.
The IFS model
The Institute for Fiscal Studies (IFS) has published its Student finance calculator, which we have used to look at forecast repayments. All repayments are given 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. It is how the long-run economic cost of the system is calculated. The cash value of repayments would be much higher.
The IFS model assumes that when the 2021/22 cohort become liable to repay, their average debt will be just over £50,000.
The chart below shows the forecast value of repayments by graduate income decile. Decile 1 includes the 10% of borrowers with the lowest income, decile 10 is the 10% with the highest income.
This forecasts that repayments for the 2020/21 cohort will range from just over £1,000 on average in decile 1 to almost £63,000 for decile 10. The average lifetime repayment across all borrowers is just over £19,000.
Overall, 22% of borrowers are forecast to repay their loans in full, this rate varies from 0‑2% in the bottom four deciles to 87% in decile 10.
Loan repayments are income contingent, so you would expect variation by income, but the large amount shown here is mainly due to the size of loans and the relatively high level of the repayment threshold, compared to graduate earnings.
The top two income deciles are forecast to repay more than they borrowed even after inflation and the Government’s cost of capital are accounted for. This is because of the higher interest charged. The taxpayer therefore makes a ‘profit’ on loans to these borrowers.
The ‘loss’ on loans for the remaining deciles more than outweighs this and the overall cost is substantial at almost £9 billion.
How much you earn matters
Women, on average, earn less than men in the UK. As a result, the IFS’s model forecasts that men will repay an average of around £42,000, more than double the £19,000 among women. It suggests 36% of men repay their loans in full compared to 10% of women.
The charts below show the forecasted value of repayments for the 2021/22 student cohort, based on whether they are a man or woman.
When do graduates make these repayments?
The value of repayments from the 2021/22 cohort starts at a low level. Relatively few borrowers earn much more than the repayment threshold when they start work.
Just 4% of total repayments from this cohort are made in the first five years. They increase steadily over time, driven up by relatively fast salary increases in the early years of a career. Repayments peak 15 to 20 years after graduation, before falling slightly over the following 10 years.
This fall happens as more and more of those with the highest earnings repay their loans in full and stop making repayments. Increases in earnings for those still repaying also slow down and some borrowers leave the labour market.
This pattern is more pronounced among men with a faster increase in repayments over the first 20 years, followed by a sharper fall. Repayments among women start off lower, increase more slowly, then hardly fall in the final ten years of their loan term.
A progressive repayment system?
The overall pattern of repayments by income was called ‘progressive’ by the (then) Government when it introduced the current system in 2012. It is progressive among borrowers as those with higher incomes pay more. But this is progressivity in a limited sense.
The large economic cost of loans must be met by the taxpayer. This is a subsidy to students who, as graduates, go on to earn substantially more, on average, than non-graduates. But they will also pay more tax on average during their working lives.
Whether the student finance system is progressive in a wider sense, once all costs and benefits are considered, is not dealt with in this series. We focus on the graduate income decile groups who win or lose from changes to the system.
While students from poorer backgrounds are somewhat more likely to be among lower earning graduates, the relationship is not simple, it is a general tendency only. Poorer students do not all become poorer graduates. It is important to distinguish between students and graduates when looking at financial flows and maintenance support.
Models can be useful for aggregate rather than individual results
Good modelling can help us understand income and repayments across the entire population of borrowers. It is not a prediction of individual earnings and repayment.
No student starting a course and taking out loans knows for certain how much they will earn as a graduate and hence how much of their loan they will repay. Some may have a better idea than others, such as those on courses based on professions with the highest earnings, or those with predictable pay progression such as teaching or nursing.
This uncertainty makes financial incentives less clear for potential students, even if they have a good understanding of student finance.
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.