Find out how different reforms would affect student loans using our interactive tool >>>

The student finance system in England is both unpopular among students and costly for the taxpayer. Reform now seems almost inevitable. Given the pressures on public finances from COVID-19, the Chancellor may want graduates themselves to shoulder a higher share of the costs. We have built a new student funding calculator, based on our detailed analysis of graduate income and student funding system, which allows users to examine the effects of changing any parameter of the system. It shows that it is essentially impossible for the Chancellor to save money without hitting graduates with middle incomes more than those with the highest incomes.

Reform is overdue

Students may fear bearing the costs of their degrees, but the taxpayer will bear on average nearly half of them. At a long-term cost to taxpayers of around £ 10bn per cohort, the current system of funding students for undergraduate degrees is costly to the public purse. Most of that cost, around £ 9bn, reflects the government cost of student loans, as around 80% of students are unlikely to ever repay their loans in full. For the 2021 cohort of new university graduates, our modeling suggests that 44% of the value of student loans will ultimately be paid by the taxpayer.

Besides its high cost, the current system has also been widely criticized on other grounds. The interest charged on student loans now far exceeds the government’s cost of borrowing, so the government makes significant profits by lending to high-income graduates who have taken out student loans (while their peers who have funded their studies by other means are stalled). The system also gives universities a free pass to admit as many students as they want to any course, leaving the government with little control over spending.

These concerns mean that reform now looks very likely. Lord Adonis, one of the architects of the UK income-tested student loan system, called the current system a “Frankenstein monster” and called for sweeping reform. The reports of the Lords Economic Affairs Committee and the Treasury Select Committee in 2018, as well as the Augar Review of Post-18 Education and Funding in 2019, reached similar conclusions.

No easy options for the chancellor

Given the new pressures on public finances from the COVID-19 crisis, as well as the planned additional spending on adult education under the lifelong skills guarantee, the Chancellor is likely to wish that graduates bear a greater share of the costs. of their education. As the new IFS student finance calculator shows, this will be more difficult than it looks under the current framework of student finance.

Despite its many shortcomings, the current system has the desirable characteristic of being progressive: higher-income borrowers by far repay the most for their student loans, and lower-income borrowers pay less (see part a of figure below). Since the highest paying borrowers are already paying so much, any plausible way to raise more money from the system will shift the costs onto middle-income borrowers, but largely save those with the highest incomes.

Raising the student loan repayment rate would be the easiest way to raise more money, but appears to be both politically unpleasant and economically ill-advised. Count both employer and employee contributions to National Insurance (NIC) and student loan repayments as taxes – which they are effectively for everyone except the highest paying borrowers – the graduate employees who pay off their loans and earn above the loan repayment threshold (currently £ 27,295) will already pay half of any extra pounds that go towards paying tax on their wages once the new health tax and social care will come into effect (counting tax as a share of the cost of labor, ie gross income plus employer’s NICs). This figure rises to 58% for those earning above the threshold for the higher rate of income tax (currently £ 50,270) and 64% for those who also have a postgraduate loan from the government. .

Marginal tax rates as a percentage of labor cost (gross earnings plus employer NIC)

Gross salary

Non graduates


Graduates with postgraduate loans

£ 27,000




£ 30,000




£ 51,000




Note: Figures for tax year 2022-2023, assuming student loan repayment rates remain unchanged and the repayment threshold remains between £ 27,000 and £ 30,000 per year.

A more realistic alternative on the table is to extend the term of student loans. Currently, all outstanding student loans are written off 30 years after students start repaying, which usually happens a year after leaving college. Many commentators, including the authors of the Augar Review, have suggested extending the loan term to 40 years.

While this would avoid increasing the additional income tax burden for borrowers in the first 30 years of their working life, the borrowers most affected by this change would still be those with high lifetime incomes but not very high (part b). The length of the loan does not matter for those with the lowest lifetime incomes, as most of them will not earn above the repayment threshold anyway and therefore will not make additional repayments. It also doesn’t affect the highest paying borrowers much, as most of them will pay off their loans in full in less than 30 years.

Another option is to lower the student loan repayment threshold, also recommended by the Augar Review (Panel c). Again, this would hit middle-income graduates the most. The lower paying borrowers would largely not be affected, as they would repay little anyway. Unless the loan interest rate thresholds are changed at the same time, the highest paying borrowers would even end up paying less because they would pay off their loans faster and earn less interest.

Average CPI payouts in real £ k by lifetime income decile, current system and reform options

Note: Panel a shows estimates for the current system (2021 entry cohort). Panel b shows the effect of extending the loan term to 40 years. Panel c shows the effect of lowering the repayment threshold to £ 20,000 (keeping the interest rate thresholds fixed). Panel d shows the effect of reducing the student loan interest rate to the RPI inflation rate. In panels b through d, the gray dots show the current system for comparison.

High interest rates mean some graduates pay back much more than they borrow

Finally, the changes in the accounting treatment of student loans introduced in 2019 mean that the Chancellor may wish to reduce the interest rates charged. Before the changes, any interest accrued on student loans was counted as a receipt in government accounts, while write-offs were only counted as an expense at the end of the loan term (or not at all if the loans were sold). This meant that – conveniently for a chancellor trying to balance the books – high interest rates on student loans dramatically reduced the short-term budget deficit on paper, whether or not the loans were ever repaid.

With the new accounting treatment, the incentives for the Chancellor have reversed: high interest rates to augment the short-term budget deficit. Indeed, only the share of student loans that the government expects to repay with interest is treated like a conventional loan; the remainder is considered an expense in the year the loans are issued. The higher the interest rate, the lower the portion of the loans that will be repaid with interest, and therefore the higher the amount of out-of-pocket expenses that counts for the deficit. Lower interest rates would still be a net negative for public finances in the long term, as the interest accrued on the portion of conventional loans would be lower, outweighing the reduction in expenditure when issuing loans. But the Chancellor is perhaps less concerned with the long term and more concerned with the next few years.

Lower interest rates would be a considerable advantage for the highest paid borrowers (panel d) and would make the system significantly less progressive. Nonetheless, there is a strong case for lower rates regardless of any accounting considerations. With the current interest rates on student loans, many high-income graduates end up repaying both far more than they borrowed and far more than it cost the government to lend them. Students whose families can afford to pay the fees up front and who are confident that they will earn enough to pay off the loan are worse off using the loan system. This erodes confidence in the system, which should be good business for all graduates. Low to middle income borrowers are generally not affected in financial terms, as they usually do not pay off their loans regardless of the interest rate, but even for them there can be unwanted psychological consequences in seeing their loan. Notional debt increase to ever higher levels due to the high interest charges.

Find out how different reforms would affect student loans using our interactive tool >>>

We are grateful to the Nuffield Foundation for funding this work, which is part of a larger program examining trends and challenges in education spending.

This research was funded by the Nuffield Foundation (grant number EDO / FR-000022637), with co-funding from the Economic and Social Research Council (ESRC) via the Impact Acceleration Account (ES / T50192X / 1) and the Center for the Microeconomic Analysis of Public Policies (ES / T014334 / 1).


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