Student finance in England: Impact of lowering the repayment threshold

Paul Bolton

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 repayment threshold. In 2021/22 the repayment threshold is £27,295 a year and it is increased in line with average earnings each year.

This Insight looks at how a reduction in the repayment threshold would affect the repayment of student loans. We examine the hypothetical effect of cutting the threshold to £25,000 in 2021/22 and find that it would result in middle earners having the largest absolute increase in repayments of any income group.

Lower earners would have the largest relative increase and women would see a larger increase in repayments than men. The economic cost of loans to the taxpayer would be reduced by £1 billion for a cohort of students.

The independent Augar Review recommended that the threshold be reduced to the level of median non-graduate earnings. This was £23,000 at the time (2019).

Middle earners would have repayments increased most with a lower repayment threshold

The effect of reducing the repayment threshold to £25,000 in 2021/22 is summarised in the charts below.

These look at the impact on borrowers based on their earning deciles (one being the lowest earners and 10 the highest) and overall financial flows. The data is from the Institute for Fiscal Studies (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.

Middle earners would see the largest absolute increase of around £4,000 on average, while the highest earners would see their repayments fall slightly.

While the increase for lower earners is below average in absolute terms, it represents the largest percentage increase at around 30%. The number of borrowers who repay their loan in full would increase from 22% under the current system to 25%.

Charts showing the impact of cutting the repayment threshold to £25,000 on graduate repayments and the cost of loans — Source: IFS Student finance calculator and House of Commons Library calculations

The Resource Accounting and Budgeting (RAB) charge is the difference between the amount lent to a cohort of students, and the present value of their repayments as graduates. The IFS forecasts that this will be 44% under the current system. Lowering the repayment threshold to £25,000 in the interest rate would reduce it to 39% and mean the overall cost of loans to the taxpayer falls by £1.0bn.

Why do repayments change in this way?

The lower repayment threshold means that some borrowers, whose income means they would repay very little, or sporadically under the current system, would make larger repayments and/or repay more often during their careers. Those with the lowest incomes would still make no repayments.

Borrowers who would not make repayments during the early part of their career under the current system, would start to make repayments earlier with a lower threshold. They would also repay more in the later part of their working life.

All those graduates who make repayments under the current system would see an increase in their monthly repayments.

For the highest earners this means they would fully repay their loans sooner, avoid some interest payments and therefore their lifetime repayments are lower, even in present value terms. More medium-high earners would repay their loans in full with a lower threshold

The timing of extra repayments

The lower threshold brings forward repayments from many borrowers and increases the total repaid each month. This means that some of the extra repayments are made by some borrowers early on in their careers.

The following chart looks at the timing of overall repayments and shows that the additional repayments start straight away and peak 5 to 10 years after borrowers become liable for repayment (the April after they complete their course).

Source: IFS Student finance calculator and House of Commons Library calculations

How does the impact vary between men and women?

As average graduate earnings are lower for women, a cut in the repayment threshold has a greater effect on average on female graduates.

The following charts show that additional repayments peak further down the male earnings scale in deciles 3 and 4. Among women, the highest absolute increases were in deciles 7 and 8. The relative increases are generally largest for the lowest earners for both men and women. However, they are substantially larger for women at more than 30% in deciles 2 and 3.

Charts showing how the impact of lowering the repayment threshold differs between men and women — Source: IFS Student finance calculator and House of Commons Library calculations

Overall, male borrowers would have an average increase in repayments of £2,400 (5.7%) compared to £2,600 (13.5%) among female borrowers.

Is it fair?

With the largest percentage increases in repayments among the lowest earners and a cut for the very highest earners, this change to the system turns the spotlight on ‘fairness’.

However, there is no universally accepted definition of what is fair in this context.

Should we look at the absolute impact on how much more someone will repay or on the percentage change? Is it fair that large numbers of graduates make little or no repayments while a few ‘overpay’ their loans? Should the overall profile of repayments be gender neutral, or, starting from the current profile should all changes to the system have the same impact on men and women (or other groups of borrowers)?

These questions are all a matter for debate and have no clear answers. Readers should note that the highest earners still pay substantially more than lower earners. The lower threshold reduces this gap slightly. If the Government is to reduce the cost of the loan system, then most options would have to involve increasing repayments from most borrowers, who do not repay in full.