Poorer graduates ‘to be hit even harder by student loan threshold change’
The Institute for Fiscal Studies pointed to a ‘crucial tweak’ in the policy’s supporting documents.
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Your support makes all the difference.Lower-earning graduates will be hit even harder by changes to student loan repayments than previously thought, analysis has shown.
The Institute for Fiscal Studies (IFS) previously warned that changes to student loan repayments announced in February would hit lower-earning graduates hardest.
Ben Waltmann, senior research economist at the IFS, said changes which will see graduates start paying their loan back over a salary threshold of £25,000 from September 2023 would benefit high-earning graduates, while increasing the cost for lower earners.
On Wednesday the IFS updated its analysis to show the impact of the changes on lower-earning graduates was set to be even higher, owing to a “crucial tweak” in the policy’s supporting documents.
The IFS previously estimated that those on lower incomes would pay £19,000 more towards their student loan across their lifetime, but it now believes those in the third and fourth earnings decile – those on lower middle incomes – will pay back £28,000 more.
This is because while the repayment threshold will be frozen at £25,000 until 2026/27, it will then be indexed to the inflation rate rather than average earnings.
Reforms to the way inflation is calculated mean the retail price index will be brought into line with the CPIH, a consumer price index that includes housing costs.
The IFS said that according to Office for Budget Responsibility forecasts, this will mean the repayment threshold of £25,000 will rise by around 1.7 percentage points less each year than it would have done.
“As a result, the reform will save substantially more for the taxpayer than we previously thought. We now think the net long-run saving on loans will be £2.3 billion per cohort rather than £1 billion,” the IFS said.
It added that the change would apply to those who had taken a loan out under the current system – those who started university between 2012 and 2022.
“It is a massive retrospective change in repayment conditions that will hit lower middling earners the most,” the IFS said.
Mr Waltmann said: “Graduates with lower middling earnings will be hit hard by the change in threshold indexing, which means that they can expect to pay off a much greater proportion of their loans, provided that current policy stays in place.
“This is true for borrowers under the current system that has been in place since 2012 as well as under the new system that will apply to university starters from 2023 onwards.”
In an announcement made in February, student loan balances will only be written off 40 years after repayments start, whereas graduates currently pay back over 30 years.
Analysis by London Economics found the changes mean “significant” increases for middle-income graduates, with men and women in this bracket paying £4,700 and £9,400 more respectively.
The Department for Education said in February that the changes would “rebalance the burden of student loans more fairly between the student and the taxpayer and ensure that in future graduates don’t pay back more than they borrowed in real terms”.
The reforms would mean that more than half (52%) of students who take out a loan to start a full-time university course would repay this in full, while less than 25% were expected to repay their loans fully if the changes did not go ahead, the Government said.
Tuition fees will be capped at £9,250 for a further two years, while student loan interest rates will be set no higher than the rate of inflation from 2023/24.