Increasing student loan repayments ‘would save government £4bn a year’

Increasing the amount that graduates in England repay on their student loans could save the government close to £4bn each year and avoid universities having their income slashed, according to a report by the architect of the current system of student finance.

Nick Hillman, who was special adviser to the universities minister in 2012 when tuition fees in England were raised to £9,000, said lowering the income levels at which students made loan repayments was the fairest and most effective way to keep higher education funded at current levels.

Using modelling done for the Higher Education Policy Institute (Hepi), Hillman found that cutting the graduate repayment threshold from £26,000 to £19,000 would result in many more graduates making higher contributions over the 30 years before their loans are written off.

The proposal comes as the Treasury is examining how to reduce the cost of the student loan system in England, with outstanding loans reaching £140bn last year. Among the changes mooted include cutting annual tuition fees to £7,500, which many vice-chancellors say would cause severe funding difficulties.

Hillman said other alternatives designed to save the government money – such as reducing student numbers or spending less on each student – were less effective and likely to be less politically palatable.

“Cutting places at a time of rising demand is particularly unwise, as is giving institutions less for teaching when their finances are already so squeezed,” Hillman said.

“Our modelling shows some of the changes to loans that might be made instead. For example, it is possible to reduce the write-off costs by reducing the repayment threshold or extending the repayment period. Such tweaks might not be popular but they could deliver savings if politicians are determined to find them.

“Reducing the repayment threshold to under £20,000 raises so much it might even enable new initiatives, such as the return of maintenance grants, alongside saving money.”

Under the current system, graduates repay 9% of their income over the first £26,575. Interest is charged on the outstanding amount but the total remaining including interest is wiped off by the government 30 years after graduation.

Hepi commissioned modelling by the consultancy London Economics, which estimated that without any changes the direct cost to the government of the 2020-21 cohort of undergraduates was more than £9bn in written off loans for tuition and maintenance.

London Economics calculated that the average student debt on leaving would be £47,000, with 54% written off after 30 years. Less than one in eight students would pay off their loans in full, while one in three wouldn’t pay back a penny.

Cutting the threshold to £19,300 – the same as it was before 2012 – would mean the write-off would shrink from £9bn to more than £5bn, while the proportion of students paying off their all their loans would double. However, average repayment rates would rise by £10,000.

The modelling found that the other proposals were far less effective. Cutting the interest rate charged to that of inflation – a popular proposal for many years – would in fact increase the write-offs as high income graduates made lower total repayments. Extending the repayment window from 30 to 35 years would make only a minimal difference.

Jo Grady, the general secretary of the University and College Union, said the proposed changes were regressive, with the biggest impact on low earners.

“Ministers, and those in thinktanks, would do well to remember that even lower-earning graduates already spend most of their 30s and 40s paying effective tax rates of over 40%. A threshold reduction to well below the average worker’s salary would make that a reality for many graduates fresh out of university too, making it harder for them to plan and save for the future,” Grady said.

Hillman said: “Different changes have different impacts on different groups and we urge policymakers who want to save money by tweaking student loans to use the next few months wisely to ensure the impact is as fair as possible.”

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