Student finance in England: Impact of reducing the fee cap

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 student finance system, fees for full-time undergraduate courses in England are capped at £9,250 per year.

While universities can charge below this level, most charge the maximum and the average annual fee loan is over £9,000.

This Insight looks at the hypothetical effect of reducing the fee cap for undergraduates to £7,500 per year and finds that it would mainly benefit higher earning borrowers, particularly men.

If the drop in fee income for universities is made up for with increased public funding, the university would not be affected overall. However, the net cost to the public sector would be around £0.9 billion for a cohort of students.

The independent Augar Review recommended in 2019 that the fee cap should be reduced to a “fair” level of £7,500 a year and that the Government should replace lost income for universities by increasing the teaching grant.

Higher earners would see their repayments fall the most

If the cap on fees was reduced, the average repayment per borrower would fall by £1,700 or 5.9%.

Higher earners would see the largest cut in lifetime repayments, but still make the largest repayments overall.

The number of borrowers who repay their loan in full would increase from 22% under the current system, to 26%.

The impact of a cap at £7,500 is summarised in the charts below. These look at the effect of the cap based on earning deciles of borrowers 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.

Charts showing the impact of cutting fee cap to £7,500 a year on graduate repayments and the cost of loans — Source: 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 fee cap to £7,500 would reduce the RAB to 41%, meaning the amount written off would be worth 41% of the original loan value. It would also cut the amount lent. The combined effect reduces the overall cost of loans to the taxpayer by £1.5bn.

Why do repayments change in this way?

The lower fee cap would mean students have smaller loans. However, as repayments are income contingent, this only results in lower lifetime repayments if the borrower repays their loan in full.

The changes can be broken down into main effects:

The 22% who are forecast to repay their loans in full under the current system, would see the full benefit of this cut as they would pay off their (now smaller) loans sooner. Regular (normally monthly) repayments would be the same while they had a debt, but they would make these repayments for a shorter period.
The 74% who would still not repay their loans in full, even with a lower fee cap, would see no change in their repayments.
The remaining 4% who would only repay in full with the lower cap, would see some benefit in lower lifetime repayments as their monthly repayment would end before 30 years.

The timing of extra repayments

The lower fee cap has no effect on repayments while someone has a debt to pay off.

It means that those who repay in full, will pay off their loans sooner. Most beneficiaries would therefore be in their 40s or early 50s.

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

Source: Student finance calculator and House of Commons Library calculations

The following charts show that the lower repayments start much further down the male earnings scale. Only the top three deciles among women would see any real reductions in repayments.

Charts showing how the impact of cutting the fee cap differs between men and women — Source: Student finance calculator and House of Commons Library calculations

Overall, male borrowers would have an average cut in repayments of £3,000 (7.0%) compared to £800 (4.0%) among female borrowers.

Impact on universities depends on changes to teaching grant

Without any increase to the teaching grant to universities, a cut in the fee cap to £7,500 would cause universities to lose around £2.1 billion in fee income per cohort. The fee cap was initially set at £9,000 in 2012/13 and has only been increased once, to £9,250 in 2017/18. It is now worth 7% less in real terms than in 2017/18 and 12% less than 2012/13.

Official data show that universities do not cover the full economic costs of teaching UK undergraduates with their income from fees and direct funding. A cut in income on this scale would have a substantial impact on the sector.

The Augar Review’s recommendation that the Government should replace this loss by increasing the teaching grant would cost £2.1 billion. It would mean the net cost of the policy (after accounting for lower loan costs) would be £0.9 billion per student cohort.

Is cutting fees affordable?

While cutting fees and fully compensating universities would be popular, the additional costs might be viewed as unaffordable given the current state of the public finances. If total spending on higher education is not to rise, then there are a range of options that the Government might consider to reduce these costs.

Make savings elsewhere in the student finance system. The Augar Review proposed changes to various elements of loan repayments and the maintenance system which, alongside the fee cut and higher teaching grant, would result in a cut in the cost of higher education to the taxpayer.
Second, it could increase teaching grant, but by less than the £2.1 billion lost by universities.
Third, it could put a cap on overall student numbers or requirements on students before they get public funding. The Augar Review suggested a minimum entry threshold and caps on courses that offered “poor value for money”.