IFS: shift to student loans will do little for public finances

21 Jul 15

The government’s decision to scrap maintenance grants and replace them with loans will increase the debt burden faced by poorer students but do little to improve the public finances, according to the Institute for Fiscal Studies.

However, the decision to freeze the loan repayment threshold at £21,000 for five years, which was also announced in the summer Budget, will significantly boost government coffers as it will lead to an increase in graduate repayments.

A briefing note published by the IFS today suggested the shift from grants to loans will give students a little more money in their pockets – £550 a year – but will result in a significant increase in student debt. The poorest 40% of students going to university in England will now graduate with debts of up to £53,000 following a three-year course, rather than debt of up to £40,500.

As a result of this, government borrowing will fall by around £2bn a year, as spending on loans does not count towards government borrowing as spending on grants does.

However, the IFS said that, in the long run, the savings would be much less, as the amount of money lent to students will increase but only around a quarter of the loans will be repaid.

IFS research economist Jack Britton said: “While the small increase in support for living costs available to students from lower-income families will undoubtedly be welcomed by many, the switch from maintenance grants to maintenance loans will result in substantially higher debt for the poorest students.”

The decision to freeze the repayment threshold, however, will see graduation repayments increase by a £3,800 on average, reducing the long-run costs to government of issuing the loans by around £1.4bn per cohort of students, the analysis, which was funded by the Economic and Social Research Council, concluded.

The IFS predicted this was likely to hit middle-income graduates the hardest, as they will end up paying more per year for the majority of the repayments.

Britton added: “The 2012 reforms appear not to have had a negative effect on higher education participation amongst full-time students from poorer backgrounds.

“This likely reflected the fact that the system was designed to protect both that group and those with low expected lifetime earnings. Only time will tell whether these new changes will be similarly benign in effect.”

Commenting on the IFS’s findings, Sally Hunt, general secretary of the University and College Union, said: “The government has created a situation where the poorest students that aspire to university will have to take on much larger debts and be hit with bigger annual repayments once they graduate.

“It is little more than a tax on aspiration and exposes this government as certainly not being on the side of the strivers.”

A Department for Business, Innovation & Skills spokesman said: “The IFS recognises the reforms in 2012 did not deter students from going to university and in fact applications from disadvantaged students are at a record level. With the lifting of the student number cap we are confident that thousands more students will be able to benefit from a higher education.”

  • Vivienne Russell

    Vivienne Russell is managing editor of Public Finance magazine and publicfinance.co.uk

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