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 the hypothetical effect of reintroducing a means-tested grant for undergraduates, of up to £3,000 a year. We find that it would have gross costs of £2.3 billion for each cohort of students and net costs of £0.7 billion if grants replace loans for eligible students.
There would be a relatively small impact on loan repayments, with the largest reductions among the highest earning graduates.
As the chart below shows, 2021/22 maintenance loans vary from around £9,500 to just over £4,400.
How much grant and who gets it?
Grants ended for new students in England in 2016/17. All maintenance support is now provided through loans which are partly dependent on the student’s household income
A £3,000 grant was the minimum recommended by the Augar Review in 2019, for socio-economically disadvantaged students. The review said: “The precise amount of grant would be for government to determine in the context of public spending.”
A grant of almost £4,000 in 2021/22 would have around the same real value as the 2015/16 grant. However, we use £3,000 here as this was the Augar recommendation, noting that it would still only be 75% of the real value from before grants were abolished.
Household income thresholds in 2015/16 were:
- Up to 25,000: Full grant
- £25,001 to £42,620: Partial grant
- Over £42,620: No grant.
Augar recommended that these thresholds should be uprated with inflation. This could mean students from households with incomes of below around £29,000 would be eligible for a full grant and partial grants for household incomes up to £50,000.
Costs depend on whether grants replace loans
According to the Institute for Fiscal Studies (IFS)’s Student finance calculator, a maximum grant of £3,000 would cost the public purse around £2.3 billion for a cohort of students. This uses the income thresholds outlined above and assumes the same values and thresholds regardless of where students live or study.
Augar recommended that grants should replace maintenance loans pound-for pound rather than be paid in addition to all current loans. The chart below shows one option for how the system could look, following the broad Augar recommendations and keeping the current maximum and minimum values for total support.
This would mean £1.8 billion less is paid out in loans. The savings in the economic cost of loans (after repayments are included) would be around £1.6 billion.
Therefore, the net costs of introducing grants in this way is around £0.7 billion (£2.3 billion minus £1.6 billion).
Only those who repay their loans in full benefit from a smaller loan
The IFS model assumes this change cuts the average debt on graduation across all borrowers by around £5,000 in 2021/22 prices. It reduces the debt for students from lower income households who are forecast to be somewhat more likely to be lower earning graduates.
Therefore, the largest cut in total debt is among those who end up being in the lowest lifetime earnings deciles. The cut is £6,700 in decile 1, compared with £2,900 in decile 10. However, this does not lead to a reduction in the loan repayments among lower earners, as shown in the charts below. This is because only borrowers who repay their loans in full benefit from a smaller loan.
Lower earning graduates do not earn enough to repay in full, even those who would receive a full grant under this change.
Some students from low-income households go on to become higher earning graduates and it is this ‘socially mobile’ group who see a cut in their repayments. They form the minority of higher-earning graduates which means the absolute reduction is smaller than for the ‘socially mobile’ alone.
How does the impact differ between men and women?
The average reduction in debt on graduation would be larger for men at £5,800 compared with £4,600 for women. Men would have a larger reduction in repayments of £1,500 compared with £200 for women, because their average earnings tend to be higher.
What is the real difference between grants and loans?
It’s been said that replacing some maintenance loan with a grant for students from disadvantaged backgrounds will have little real impact.
Most will see no real difference in their loan repayments despite leaving university with a smaller debt. Jim Dickinson Associate Editor at Wonkhe, a higher education policy website, has argued that it is a superficial change and students would be better served with increases in the total amount of maintenance support available.
The Augar Review made a different argument: Students from lower-income backgrounds are more debt-averse, and the current system means they graduate with higher debts that those from better-off backgrounds and this deters some from going to university.
The review’s proposals to reintroduce grants and cut fees would, it estimates, cut the debt of a graduate from a disadvantaged background from around £60,000 at present to around £45,000.
The review also recommended cutting the maximum level of maintenance support available to students by around 1.5%, despite presenting evidence that the current level of support was less than what students spend on maintenance and that over half of students have part-time jobs to help meet these costs.
Other articles in this series
The Library briefings Abolition of maintenance grants in England from 2016/17 and The value of student maintenance support give more background on changes to maintenance support.
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.