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

Appendix 7: Modelling of changes to student loans

The Committee asked the Institute for Fiscal Studies to model the effects on Government spending of changing the parameters on student loans. Some of these scenarios are reproduced below.

The current parameters for student loans are:

Under the present system of student loans, the upfront Government spend was £16.7 billion for the 2017/18 cohort (which includes the outlay on tuition fee and maintenance loans and the remaining funding by direct grant). The Institute for Fiscal Studies calculates that the long-run cost to Government for the 2017/18 cohort will be £8.4 billion (in 2017 prices), once repayments are taken into account.

Scenario 1: Lowering the repayment threshold to £15,000

Government spending on the 2017/18 cohort if the repayment threshold was lowered to £15,000 (other parameters the same as the current system)

Upfront funding via student loans

£16 billion

Upfront funding via grants (counted in the deficit)

£0.7 billion

Long-run cost to Government (value of student loans in 2017 prices which will not be repaid)

£3.9 billion

Difference in the long-run cost to Government compared to the present system

Reduced long-run cost of £4.5 billion

Source: Institute for Fiscal Studies work commissioned by the Committee

Scenario 2: Lowering the interest rate to RPI + 0.7 per cent

Government spending on the 2017/18 cohort if the interest rate was lowered to RPI + 0.7 per cent (other parameters the same as the current system)

Upfront funding via student loans

£16 billion

Upfront funding via grants (counted in the deficit)

£0.7 billion

Long-run cost to Government (value of student loans in 2017 prices which will not be repaid)

£9 billion

Difference in the long-run cost to Government compared to the present system

Increased long-run cost of £0.6 billion

Source: Institute for Fiscal Studies work commissioned by the Committee

Scenario 3: Lowering the interest rate to RPI + 0.7 per cent, lowering the repayment threshold to £15,000 and introducing a tiered repayment rate

In the tiered repayment scenario, the repayment threshold was set at £15,000 a year. Graduates paid 3 per cent of earnings above the threshold if they earned between £15,000 and £25,000 a year; 6 per cent of earnings above the threshold if they earned between £25,000 and £35,000 a year; and 9 per cent of earnings above the threshold if they earned above £35,000 a year.

Government spending on the 2017/18 cohort if the interest rate was lowered to RPI + 0.7 per cent, the repayment threshold lowered to £15,000 and a tiered repayment introduced (other parameters the same as the current system)

Upfront funding via student loans

£16 billion

Upfront funding via grants (counted in the deficit)

£0.7 billion

Long-run cost to Government (value of student loans in 2017 prices which will not be repaid)

£7.6 billion

Difference in the long-run cost to Government compared to the present system

Reduced long-run cost of £0.8 billion

Source: Institute for Fiscal Studies work commissioned by the Committee

The Institute for Fiscal Studies also modelled the effect on the present system of lowering fees to £6,000. The results for the present system, and for making the same adjustments as in the first three scenarios above, are presented below.

Scenario 4: Reducing tuition fees to £6,000

Government spending on the 2017/18 cohort if tuition fees were reduced to £6,000 (other parameters the same as the current system)

Upfront funding via student loans

£15.3 billion

Upfront funding via grants (counted in the deficit)

£2.6 billion

Long-run cost to Government (value of student loans in 2017 prices which will not be repaid)

£9.7 billion

Difference in the long-run cost to Government compared to the present system

Increased long-run cost of £1.3 billion

Source: Institute for Fiscal Studies work commissioned by the Committee

Scenario 5: Reducing tuition fees to £6,000 and lowering the repayment threshold to £15,000

Government spending on the 2017/18 cohort if tuition fees were reduced to £6,000 and the repayment threshold was reduced to £15,000 (other parameters the same as the current system)

Upfront funding via student loans

£15.3 billion

Upfront funding via grants (counted in the deficit)

£2.6 billion

Long-run cost to Government (value of student loans in 2017 prices which will not be repaid)

£6 billion

Difference in the long-run cost to Government compared to the present system

Reduced long-run cost of £2.4 billion

Source: Institute for Fiscal Studies work commissioned by the Committee

Scenario 6: Reducing tuition fees to £6,000 and lowering the interest rate to RPI + 0.7 per cent

Government spending on the 2017/18 cohort if tuition fees were reduced to £6,000 and the interest rate was reduced to RPI + 0.7 per cent (other parameters the same as the current system)

Upfront funding via student loans

£15.3 billion

Upfront funding via grants (counted in the deficit)

£2.6 billion

Long-run cost to Government (value of student loans in 2017 prices which will not be repaid)

£10.2 billion

Difference in the long-run cost to Government compared to the present system

Increased long-run cost of £1.8 billion

Source: Institute for Fiscal Studies work commissioned by the Committee

Scenario 7: Reducing tuition fees to £6,000, lowering the interest rate to RPI + 0.7 per cent, lowering the repayment threshold to £15,000 and introducing a tiered repayment rate

Government spending on the 2017/18 cohort if tuition fees were lowered to £6,000, the interest rate was lowered to RPI + 0.7 per cent, the repayment threshold lowered to £15,000 and a tiered repayment introduced (other parameters the same as the current system)

Upfront funding via student loans

£15.3 billion

Upfront funding via grants (counted in the deficit)

£2.6 billion

Long-run cost to Government (value of student loans in 2017 prices which will not be repaid)

£9 billion

Difference in the long-run cost to Government compared to the present system

Increased long-run cost of £0.6 billion

Source: Institute for Fiscal Studies work commissioned by the Committee





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