Students aiming for high-earning graduate jobs will save £20,000 in loan repayments if they delay university entry, while middle earners face paying £30,000 more over their lifetime, according to new analysis by the Institute for Fiscal Studies.
The IFS analysis highlights how the government’s student loan changes in England, which come into effect next year, have drastically tilted repayments in favour of highly paid graduates.
Students on courses such as medicine, economics and law, which can lead to lucrative careers, would benefit by taking loans under the new format from September 2023, because of the lower rates of interest charged.
In contrast, students who anticipate going on to lower-paid jobs should enrol on undergraduate courses this year to take advantage of loan write-offs occurring after 30 years rather than 40 years, and a higher starting income before having to make repayments, under the government’s changes.
“For 2022 school leavers, this means that incentives regarding whether to take a gap year will crucially depend on their expected future earnings,” the IFS noted.
Ben Waltmann, a senior research economist at the IFS, said: “Student loans reform will reduce the cost of loans for the taxpayer and the highest earners, whereas borrowers with lower earnings will pay a lot more.
“How much more exactly is inevitably uncertain but our best estimate is that lower-middling earners from the 2023 entry cohort onwards face the highest extra cost at around £30,000 over their lifetimes.
“The eventual impact of the reform is hugely uncertain, and will depend on economic developments and on government policy many decades into the future.”
Graduates in the lower-middle lifetime earnings range would be earning £33,000-£36,000 by the age of 30, in today’s money, according to the IFS model. Higher earners would be those in the top 30%, with earnings of £50,000 or more at the age of 30.
The IFS said the government’s changes – announced in the spring statement by the chancellor, Rishi Sunak – have stripped out progressive elements of the system introduced in 2012, describing the policy as “moving away from a system which redistributes heavily from high- to low-earning graduates”.
Larissa Kennedy, the president of the National Union of Students, described the changes as “calculated cruelness” at a time when the cost of living was soaring.
“Ministers are saddling young people with unimaginable debt for the next 40 years of their lives. This is nothing more than an attack on opportunity,” Kennedy said.
Under the existing system, the loans of high-earning graduates have interest rates set by the retail prices index (RPI) plus 3%. However, the changes mean the RPI rate alone will be used to set interest rates.
“Under the new system, most will just pay back what they borrowed – neither more nor less. This moves us away from something very much like a graduate tax to something for which the term ‘student loans system’ is much more appropriate,” the IFS said.
For most graduates, the 2012-era loan system involved paying back 9% of their earnings above the repayment threshold for 30 years, irrespective of their total debt. Under the changes, with a 40-year repayment period, the IFS expects more than 70% of graduates will repay their loans in full.
The IFS also drew attention to a little-noticed change, which switches the way in which the starting point for repayments will be calculated.
Graduates currently make repayments on their earnings above £27,295, with the threshold raised each year in line with average earnings growth. After the government’s changes, the threshold will rise more slowly, based on RPI rates – which the IFS says will alone cost middle-earning graduates more than £10,000 in higher repayments over their lifetimes.
“It is somewhat concerning that such a significant change was not mentioned at all in the press materials announcing the reforms,” the IFS said.
The changes also make “the higher education funding system in England even more of an outlier internationally” by using lower public spending than most other developed countries to support higher education, the economists said.
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Student loan changes in England will cost middle earners £30k
