The Spending Plan policy 19: amend repayment terms on student loans

May 07, 2015 11:00 AM

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There is a good case for taxpayers to be asked to underwrite a loans system for students in higher education to promote participation, a more educated population and a more skilled workforce.

However, this case becomes less strong when the case is for a particularly generous system that, in effect, tells all taxpayers, including uneducated ones on low incomes, to pay more tax so that educated graduates can enjoy a generously subsidised repayment regime.

The cost of subsidised interest on student loans is forecast by the Office for Budget Responsibility (OBR) to be £4.9 billion next year. The Institute for Fiscal Studies (IFS) calculated the impact of amending the terms of the new loans system on the net present value of the whole lifetime of the loans for a cohort of 300,000 students. We used these estimates to calculate the potential savings by implementing similar measures on existing loans.

In total, we estimated that all three measures would save around £2.7 billion, once we adjusted for the differences between the proposals the IFS assessed and the ones we have recommended, and further adjusted them to account for overlaps.

The estimates for the three individual measures are:

Raise repayment rates from 9 per cent to 15 per cent. We estimated that this would save around £1.4 billion a year.

  • Cut the repayment threshold from around £18,000 to £15,000. We estimated that this would save around £700 million a year.
  • Raise the interest rate from RPI to RPI plus 3 per cent. We estimated that this would save around £1.3 billion a year.

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