Treating Students Fairly: The Economics of Post-School Education Contents

Chapter 8: Student loan design

261.At present, student loans are subject to the following parameters:

262.The Committee heard proposals for changing all of these. Many different scenarios were proposed. The Institute for Fiscal Studies modelled some of them for us, including reducing fees to £6,000. This modelling is in Appendix 7.

263.This chapter examines our proposed changes to the parameters. We note that the terms changed as recently as April 2018 with the raising of the repayment threshold.277

Lowering the interest rate

264.Interest is charged on post-2012 student loans at RPI plus 3 per cent during study, until the April after the person leaves the course. Following that April:

265.Many witnesses thought the rate of interest charged on student loans was too high. The Sutton Trust described it as an “unwelcome feature”, highlighting that the highest rate of RPI plus three per cent applies from the day a student begins their studies. The University of Cambridge said that no interest should accrue until graduation, with a sliding interest rate dependent on earnings afterwards that was capped at CPI plus one per cent. They pointed out this wouldn’t cost the Government much in the long-run, “in light of the proportion of student loan lending which is written off under the present system.”278

266.Some witnesses were concerned about any changes being regressive. The National Union of Students said that lowering interest rates would help only the highest earning graduates.279 Paul Johnson said that the interest rate “is plucked out of the air”, but that it did add a “degree of progressivity” to the system.280

How progressive is the present system?

267.The Department for Education said that the system “is progressive in that higher earning graduates pay more than lower earning graduates.”281 Dr Gavan Conlon, from London Economics, said the system was not progressive when the value of repayments was calculated in real terms:

Dr Gavan Conlon: For 17 years out of 30 … high earners pay more than lower earners, but the problem is that lower earners continue to pay from year 17 or 18 all the way up to year 30. Adding up the total value in real terms—forget about cash values …

Lord Burns: I thought the 6.1 per cent interest rate was to try to offset that.

Dr Gavan Conlon: But it has not achieved that, so the system is not even progressive. Individuals with lower levels of earnings, because they are locked in for 30 years, pay more over that period in real terms—today’s money terms—than those who repay a larger amount for each of 17 years. On a like-for-like basis, individuals in occupations that pay less will end up paying more.

The Chairman: Are you saying that is not progressive?

Dr Gavan Conlon: Correct.”282

268.A 2017 London Economics report published estimates of nominal and real repayments for different occupations for men and women, as reproduced in Tables 10 and 11.

Table 10: Estimated cumulative student loan repayment per graduate by occupation (men)

Social workers

School teachers

Nurses/ midwives






Repayments (nominal value)









Net present value repayments (real value)









Source: London Economics, ‘The impact of student loan repayments on graduate taxes’, July 2017: [accessed 24 May 2018]. London Economics assumed that loans covered three years of study except for student teachers (four years) and medical students (five years).

Table 11: Estimated cumulative student loan repayment per graduate by occupation (women)

Social workers

School teachers

Nurses/ midwives






Repayments (nominal value)









Net present value repayments (real value)









Source: London Economics, ‘The impact of student loan repayments on graduate taxes’, July 2017: [accessed 24 May 2018]. London Economics assumed that loans covered three years of study except for student teachers (four years) and medical students (five years).

269.London Economics analysed these findings as follows:

“Men in more public sector orientated occupations with relatively low wages end up making repayments for the entire duration of the repayment period (and despite this, never repay their full loan balance). This compares to higher-paying occupations, such as legal professions, where because repayment takes place earlier in a male graduate’s working life (and there is less accumulated interest), the total repayment in real terms is actually marginally lower than repayments in the nursing profession (£59,000 compared to £55,000).

A similar phenomenon can be seen amongst females in occupations with above-average earnings (IT professions, for instance), where approximately £56,000 in loan and accumulated interest repayments are made. Despite a £10,000 outstanding balance existing at the end of the repayment period, this still represents a greater level of real repayment than men in finance or legal occupations.”283

270.They concluded that graduates in the middle of the earnings distribution would pay the most:

“In other words, there appear to be incentives to pay off student loans early—or not at all—but being positioned in the middle of the earnings distribution appears to offer the worst possible outcome from the individual’s perspective.”284

271.The University of Cambridge also said that it was middle earners, “those who just about repay their loan over 30 years—who pay the brunt of the cost.”285

272.When the net present value of repayments is considered, the student loan system does not appear as progressive as its advocates have suggested—graduates who only just pay off the loan within the 30 years will pay far more in real terms than higher-earning graduates who pay the loan off sooner.

Use of the Retail Prices Index

273.The interest rate on student loans is calculated using the Retail Prices Index. There are known problems with this measure of inflation, which are described in Box 11.

Box 11: Problems with the Retail Prices Index

In 2010 the ONS made what appeared to be routine improvements to the way prices for clothing were collected. When the changes were implemented however, the formula effect in the RPI widened from around 0.5 percentage points to 0.9 percentage points. A subsequent ONS consultation and review found that the RPI did not meet international standards. The UK Statistics Authority stripped RPI of its national statistics status in March 2013.

Paul Johnson carried out a review of consumer price statistics for the Government in 2015. The review concluded that “RPI should not be used for new contracts” and “taxes, benefits and regulated prices should not be linked to the RPI.” The report also criticised the Government using the lower rate of CPI when paying out money and RPI when receiving money:

“There is a public perception that Government engages in such ‘inflation rate shopping’. In particular, there is a belief that when the Government is paying out money, the lower CPI is used, whilst the higher RPI measure is used when the Government is receiving money. Such ‘inflation rate shopping’ is highly undesirable and undermines public trust in the statistics. It is a reason for avoiding additional measures of inflation, unless these can be fully justified. It is also a reason for reducing the number of main measures of inflation if at all possible.”286

274.When the Governor of the Bank of England appeared before the Committee in January 2018 he was asked about the continued appropriateness of using RPI to calculate measures such as the interest charged on student loans. He said that given the known errors, RPI should not be embedded further in contracts. Figure 9 compares RPI against the UK ten year gilt rate over the last 20 years.

Figure 9: Retail Prices Index (monthly, percentage change over the previous 12 months) versus monthly average yield from British Government securities, 10 year nominal par yield, March 1998 to March 2018

Line graph comparing percentage change of RPI and UK 10 year giltrate from 1998 to 2018

Source: Office for National Statistics, ‘Consumer Price Inflation time series dataset (MM23)’, 18 April 2018: [accessed 9 May 2018]; Bank of England, ‘Monthly average yield from British Government Securities, 10 year Nominal Par Yield’, 1 May 2018:
[accessed 9 May 2018]

275.We recommend that the interest rate charged on post-2012 student loans should be reduced to the level of the ten-year gilt rate (currently 1.5 per cent). This is fairer for students as it means that they only pay an interest rate which is equivalent to the Government’s cost of borrowing money. Interest should not be charged on loans until students have graduated.

276.There should be no change to the repayment threshold, the repayment rate or the term of the loans.

277.The cost of this proposal is considered at the end of the report in Chapter 10.

Tuition fee levels

Current maximum tuition fee

278.As explained in Chapter 3, the 2012 funding reforms raised the maximum tuition fee amount that an institution could charge to £9,000. In the 2015 Summer Budget, the Government announced that institutions offering ‘high teaching quality’ would be able to increase their tuition fees in line with inflation from 2017/18.287 The barometer of high teaching quality was whether an institution received a ‘meets expectations’ rating in the first year of the Teaching Excellence Framework.

279.The first year of the Teaching Excellence Framework took place in 2016. An institution received a ‘meets expectations’ rating if it had passed its most recent inspection by the Quality Assurance Agency for Higher Education. There were 471 institutions who were eligible to take part in the assessment’s first year. The results do not appear to be available publicly but 96 per cent of universities had passed their Quality Assurance and Agency inspection in 2014. David Kernohan, Associate Editor of the higher education blog Wonkhe, said that “the upshot is that just about every university will be eligible to raise fees”.

280.In 2017/18, the fee cap for nearly every institution was therefore raised by the retail price index (2.8 per cent) to £9,250. The expectation was that institutions that passed the Teaching Excellence Framework in subsequent years (by receiving a gold, silver or bronze rating under its revised classifications) would be able to raise fees in line with the retail price index. But the Prime Minister announced in October 2017 that tuition fees would be frozen at £9,250 for the duration of the Government’s review of higher education.288

Tuition fee freeze

281.Professor Julia Buckingham, from Universities UK, said that “we are obviously concerned that the fees are flat at the moment.” She said if the unit of resource per student was not maintained, “we are not going to be able to deliver the quality of education that we would like.”289 The University of Cambridge said that it “strongly supports” ensuring that the real value of tuition fees is maintained.290

282.Professor Madeleine Atkins said that the sector had already factored in the possibility that fees would not rise. She said the freeze was “reasonably sustainable in the short term but not sustainable as a long-term trend. The gearing in the sector is somewhere around 34 per cent, 35 per cent or 36 per cent. Again, that is reasonable in the short to medium term.”291

Value for money

283.Students complained to the Committee about current fees not providing value for money. A business student said his degree did not at all provide value for money: “there are 200 students in my class, no particular equipment, lecturers reading off slides.”

284.A mother on the Committee’s MoneySavingExpert page complained that her son was paying £9,250 a year in fees and receiving less than eight hours tuition a week: “ This excuse of ‘self-guided study’ is an absolute cop-out and no value for money. I remember being amazed at the difference in five years all the universities having brand new facilities, or in the process of new buildings being built. All paid for by students, but no value in return.”292

285.Lord Adonis said he had seen “no evidence from universities that a high proportion of the courses they offer cost anything like £9,250.” He questioned the lack of transparency around how much courses cost universities to provide:

“They will not publish accounts showing, course by course, how much each costs and what proportion of the courses they offer costs the same as or more than the actual fee level. To my mind, that is a matter of great concern, because I see no reason whatever why students should have to pay more than the actual cost of their course for their degree and be saddled with very high levels of debt.”293

Cross-subsidisation of courses

286.Other witnesses were also critical of the notion that courses that cost less to teach than the tuition fee charged were subsidising courses that were more expensive to teach. One optometry student said that her friends that were studying media studies were subsidising her degree as “their lectures do not cost £9,000” whereas she studied “in a lab full of expensive kit.”

287.The sector denied that this subsidisation occurred. Professor Madeleine Atkins said that there were “no vast profits” being made on fees:

“There is a sense sometimes in the media that classroom-based subjects are overpriced at £9,000, and that a considerable surplus must be being made there, which is then directed to higher-cost courses. Our analysis suggests that that is not the case. Indeed, any surplus on classroom-based courses is eroding fast, due to inflation and other things.”

288.She said the main subsidy came from the higher fees charged to international students. Professor Stirling agreed the subsidy came from international students. He said that for STEM subjects it cost around £12,500 per student per year to deliver an undergraduate degree: “we make a loss on every home and EU student we teach. On the other hand, we have a lot of international students … That is how we survive and how we are able to be financially sustainable.”294

289.Professor Sir Keith Burnett said the subsidisation argument was “simply not true” at the University of Sheffield:

“We do not cross-subsidise between English, the social sciences and engineering. Actually, each department gets the full tuition fee that is paid and each will use it to the greatest effect for its students. There is no cross-subsidy at my university.”295

290.Professor Bailey did however admit that for subjects such as business, which do not require extensive facilities and were easy to attract students into, “it is relatively easy to offer a degree in that area less expensively and still make a profit.”296 Dr Marginson said he suspected that in many institutions, “the relatively low-cost business programmes, which generate high volumes of students, with large numbers of international students paying full fees and so on, subsidise a lot of other activity.”297

Cross-subsidisation of teaching and research

291.Another area of subsidisation that was raised was between teaching and research. Samuel Brook, a 2016 graduate, said universities did not provide value for money because tuition fees were spent on research: “If the government wants to fund research at universities it can do so, however students at those universities should not provide huge subsidies for something that doesn’t materially affect them.”298

292.Dr Marginson said it was a “complex problem”:

“The tendency has been for us to find every way and means we can to subsidise and build research, because research is not only integral to the role of universities but has become central to their national and global competition … We are using our teaching money where we can, whether it is domestic or foreign income, to subsidise our research output and effort.”299

Other benefits of higher education

293.Pam Tatlow cautioned against the “great temptation” to focus on value for money: “we have to add the wider public benefits of investment in higher education.”300 The University of Manchester Students Union said university was also about “acquiring skills, personal development, new opportunities, broadening horizons, meeting friends for life, and learning about other cultures and people of different backgrounds. There are no metrics to measure these.”301

Reducing fees

294.Lord Adonis said that there was “a revolt” from students over value for money and the present system “has death written all over it.”302 He called for lower fees and said that the funding per pupil for a secondary school in England was £4,800, “which is almost precisely half what we pay for university courses, many of which are considerably less intensive than secondary school courses.”303

295.Samuel Brook said that reducing fees did not have to mean increased government spending, “instead it could mean more pressure on university budgets.”304 Another recent graduate, Krutnik Patel, said that his degree was not worth £9,000 a year. He said universities were using the higher fees “for enterprise” and said they should be reduced to £3,000 a year.305

296.Dr McGettigan said that he thought the present funding system worked well for “Oxford, Cambridge, LSE and few other highly selective institutions”, but “we have a loan scheme that makes no sense for the vast majority of borrowers.” He said other institutions needed “a different kind of funding. If we think they are the institutions that are doing the most for social mobility, and the most work on widening participation, we should restore direct grant to enable them to lower their fees.”

Widening access

297.As discussed in Chapter 3, if universities charge the maximum fee of £9,250, they are required to spend a portion of this on widening access to universities. This arrangement is described in Box 12.

Box 12: Widening access requirements

All English universities that want to charge higher fees (above £6,000 per annum) must have an access agreement with the Office for Fair Access (OFFA), the DfE-sponsored agency which “safeguards and promotes fair access to higher education”.

Access agreements are negotiated individually with institutions, and there is no statutory minimum investment level set by the OFFA; rather, it sets guidelines with the ability to levy fines or reduce fee rates if objectives are not met. These guidelines only apply to fees above £6,000.

Guideline spending levels for universities [and indicative funding amounts assuming a full fee of £9,250 is charged] are:

  • Low proportion of students from under-represented groups: 30 per cent [£975]
  • Average proportion: 22.5 per cent [£731]
  • High proportion: 15 per cent [£487]

298.Nottingham Trent University said that they spend £500 of each undergraduate’s tuition fee on widening access. They warned that if tuition fees were reduced, “there will not be the ‘financial headroom’ to undertake these impactful activities at the current scale.”306

299.The Minister for Universities and Science said that students “are not just paying for their tuition, they are paying a university fee, and some of that money goes on hardship and some of it goes on disadvantaged students.”307

300.There is little transparency around what universities are spending their income on. Students have little idea about the activities that their course fees may be subsidising. Tuition fees should remain frozen at £9,250 for the medium-term.

277 See paragraph 346.

278 Written evidence from the University of Cambridge (HFV0040)

279 Written evidence from the National Union of Students (HFV0050)

280 Q 9 (Paul Johnson)

281 Written evidence from the Department for Education (HFV0086)

282 Q 28 (Dr Gavan Conlon)

283 London Economics, The impact of student loan repayments on graduate taxes (July 2017): [accessed 29 May 2018]

284 Ibid.

285 Written evidence from the University of Cambridge (HFV0040)

286 Paul Johnson, UK Consumer Price Statistics: A Review (January 2015): [accessed 29 May 2018]

288 The Prime Minister said that the Government would “undertake a major review of university funding and student financing. We will scrap the increase in fees that was due next year, and freeze the maximum rate while the review takes place.” Theresa May’s speech to Conservative Party Conference (October 2017): [accessed 14 May 2018]

289 Q 79 (Professor Julia Buckingham)

290 Written evidence from the University of Cambridge (HFV0040)

291 Q 45 (Professor Madeleine Atkins)

292 Money Saving Expert, ‘Is post-school education good value for money?’ (August 2017): [accessed 14 May 2018]. This thread was posted on the Money Saving Expert forum at the Committee’s request.

293 Q 3 (Lord Adonis)

294 Q 70 (Professor James Stirling CBE)

295 Q 70 (Professor Sir Keith Burnett)

296 Q 56 (Professor Patrick Bailey)

297 Q 39 (Dr Simon Marginson)

298 Written evidence from Samuel Brook (HFV0091)

299 Q 39 (Dr Simon Marginson)

300 Q 56 (Pam Tatlow)

301 Written evidence from the University of Manchester (HFV0069)

302 Q 9 (Lord Adonis)

303 Q 7 (Lord Adonis)

304 Written evidence from Samuel Brook (HFV0091)

305 Written evidence from Krutnik Patel (HFV0058)

306 Written evidence from Nottingham Trent University (HFV0079)

307 174 (Sam Gyimah MP)

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