Personal Finance

Student loans in England: who pays what?

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With England’s universities warning of a looming financial crisis and families questioning the price of higher education in the wake of new rules for student loans, a new study has set out different ways of addressing funding challenges facing the sector.

Modelling by consultancy London Economics for the Nuffield Foundation charity not only compares how the new loan system changes individual repayment rates relative to before, but also sets out what would happen if a future government were to impose a 1 per cent real interest rate or cut tuition fees back to £6,165.

Gavan Conlon, the research lead at London Economics, said that ahead of the election expected this year, politicians needed to have greater comprehension of how the student loan system works to make more informed choices about policy changes.

“Political parties . . . really need to better understand how their funding systems operate so that the consequences of any manifesto commitments are fully understood,” he added. “The challenge is that the economics doesn’t always align with the politics.”

Will low earners pay more under the new system?

In September 2023, the UK government introduced reforms to the English student loan system. While the headline tuition fee of £9,250 remained unchanged, the new rules cut the minimum salary at which repayments begin from £27,295 to £25,000; slowed down the rate at which the threshold increases; removed the interest above inflation charged on the loans; and extended the time graduates had to continue to repay them from 30 years to 40 years.

The changes mean the average student starting university in 2023-24 will graduate with very similar levels of debt — £50,500 compared to £52,100 under the previous system — but will now repay the loans in very different ways.

For low earners, who previously had a sizeable share of their debts written off, the introduction of a longer repayment period and a lower salary threshold increase lifetime repayments. Meanwhile, higher earners now clear their debt more quickly as lower interest rates reduce the amount they are expected to pay back.

Women are disproportionately affected by these changes as career breaks and job choices result in lower average lifetime earnings. According to the modelling, the average full-time female student starting their first degree in 2023-24 will pay back £10,000 more than under the old system, while the average male student will repay £7,500 less than they would have previously.

What will middle earners pay?

Under the new system, all but the lowest earners pay back a similar amount — between £54,000 and £56,000 — but this means loan repayments will make up a larger share of the income of teachers, nurses and other middle earners than for those on the highest salaries.

A woman in the middle of the income distribution pays 3.1 per cent of her lifetime income over the repayment period, five times the proportion paid by the top 10 per cent of male graduates.

What happens if real interest rates are introduced?

The looming financial crisis at UK universities has raised the question of further reforms.

One way to plug the gap in finances would be to make graduates pay back more than they borrowed by reintroducing real interest rates on loans. Interest of 1 per cent above the retail price index for the highest earners, with a smaller rise for those earning between £25,000 and £45,000, would increase government revenue by £2bn, according to London Economics.

This would result in higher repayments for graduates — a rise of £6,200 for the average man and £5,100 for the average woman — but not everyone would be affected. The total amount paid by the lowest 10 per cent of male graduates and lowest 40 per cent of female graduates would not change.

There is little appetite to address the funding gap by increasing tuition fees, which have been frozen for over a decade. Labour only dropped a pledge to abolish them completely in 2023.

Reducing tuition fees would only benefit mid-income and high-earning graduates, as those on lower pay currently have a large share of their debt written off after 40 years.

According to London Economics, if fees were cut by even a third it would cost the government £3bn to maintain current levels of funding for higher education institutions.

How do different funding models affect public finances?

Because not all students pay off their loans, the UK public purse in effect subsidises higher education by picking up the tab for unpaid debts.

The cost to the exchequer is partly determined by how much students repay. Any reforms that increase overall repayments will reduce the cost for the government and potentially free more funding for higher education institutes or for greater maintenance support.

For example, adding an interest rate of 1 per cent above inflation would reduce the UK government’s overall contribution to zero, based on current projections — although this will probably change as the recent increase in borrowing costs may mean the price of servicing the student loan book will be substantially re-evaluated.

A report by the Institute for Fiscal Studies think-tank found that higher government borrowing costs were likely to add more than £10bn a year to the cost of England’s student loan system.

Other parts of the United Kingdom have very different systems, with lower fees, different approaches to maintenance support, different interest rates and shorter loan-repayment periods.

Smaller populations and caps on student numbers allow devolved governments to foot a much larger share of the bill — 44 per cent in Wales and 51 per cent in Northern Ireland. In Scotland, the government pays the entire cost of the higher education system, with the average student receiving more in grants than the cost of their tuition loans.


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