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New higher loan repayment threshold is a big (and expensive) giveaway to graduates

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On Sunday, the Prime Minister Theresa May announced that the income threshold above which graduates start making repayments on their student loans would be increased from £21,000 to £25,000 for all those who started university after 2012.

This apparently small technical change will save middle earning graduates a lot of money – up to £15,700 over their lifetimes. It also represents a big shift in policy raising the long run cost to the taxpayer of providing higher education by around 40%, or over £2.3 billion a year in the long run.

Tuition fees will also be frozen. In the short term this is a much smaller change, reducing the debt on graduation of the next cohort of students taking three-year degrees by just £800 and saving government £0.3 billion. In the long run it will be unsustainable as university funding falls in real terms.

Key findings:

Increasing the repayment threshold to £25,000 reduces the annual repayments of graduates earning more than £26,500 by £500 in 2020 (in cash terms). This reduces average lifetime repayments by around £10,000 (2017 prices), or by up to £15,700 for those in the middle of the graduate earnings distribution. As a result, 83% of graduates will not have fully repaid their loans by the time they are written off 30 years after graduation (up from 77%).

  • This change alone increases the long-run taxpayer cost of providing HE by £2.3 billion per year – a 41% increase.The effect is so big because the policy significantly reduces repayments by almost all graduates.
  • The lowest earning 40% of graduates are now better off under the current system than they would have been under the pre-2012 system. This is because the new higher repayment threshold only applies for post-2012 loans, and so despite having larger in debts low earning graduate make smaller repayments under the new system
  • Freezing tuition fees only has a small impact in the short-run.This reduces the debt on graduation of a student starting a three-year degree in 2017 from £50,600 to £49,800. This only reduces the repayments of the very highest earning graduates as most do not repay their loans in full.
  • Freezing tuition fees in cash-terms reduces university fundingand saves the government £0.3 billion a year in the long run. The impact on universities is small is the short-run but will grow the longer the freeze is kept in place. This creates uncertainty about future university income and makes it difficult for universities to make long-term
  • The combined impact of these changes is to increase the RAB charge to 45%, up from 31%.

Chris Belfield, an author of the report, said:

“Raising the repayment threshold to £25,000 is a seemingly small change to the student loan system, but it will save middle earning graduates up to £15,700 in repayments over their lifetimes. This comes at a considerable cost to the taxpayer, raising the long-run cost of providing Higher Education by £2.3 billion per year, an increase of 40%.”

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