Dr Matt Dickson is Reader in Public Policy and research lead on widening participation in higher education in the Institute for Policy Research (IPR) at the University of Bath.
Since the Government released its long-awaited response to the Post-18 Review of Education and Funding (the ‘Augar Review’ of 2019), there have been a flurry of articles picking through the proposals and digesting the implications of the various changes to the UK’s higher education landscape.
While many have examined the constituent parts and how they may affect widening participation, much of the focus has been on widening participation narrowly defined as access to higher education, with less attention paid to widening successful participation.
In this mini-series of blogs we will look at the Government’s changes to the system and consider what they might mean for both access to and success in higher education for students from widening participation backgrounds.
As a starting point, here is a recap of the key features of the announcement:
- Fees, loans and repayments:
- the headline maximum tuition fee will be frozen at £9,250 until 2025;
- threshold for starting repayments reduced to £25,000 (from current £27,500) and frozen at this level until 2027;
- the interest rate on student loans will be reduced from the current RPI+up to 3% (depending on earnings) to just RPI, meaning that no student pays back more in real terms than they actually borrowed;
- the repayment term is extended from 30 to 40 years.
- Lifelong Loan Entitlement to be introduced from 2025, and be worth the equivalent of four years of post-18 education to be used over their lifetime (i.e. £37,000 in today’s fees), with funds for both individual modules and full years of study at higher technical and degree levels (Levels 4 to 6).
- Consultations on:
- minimum entry requirements – a threshold for accessing tuition fee and maintenance loans;
- targeted student number controls to stem the growth of ‘low-quality’ courses.
- National state scholarship scheme investing £75m for talented students from disadvantaged backgrounds.
- £900m additional investment in HE over three-years, including £750m for teaching, facilities and equipment to expand the provision of high-cost, high-return subjects including STEM subjects, and to expand provision of degree apprenticeships.
Fees and finance
Perhaps unsurprisingly given the contentious nature of the issues of tuition fees, graduate debt and repayment terms, many headlines have zeroed in on the announcements here and the consequences the new arrangements will have for the equity of the system.
With the value of outstanding loans on the books currently at £161 billion and forecast to grow to half a trillion pounds by the middle of the century it is no surprise that the Government felt the need to amend the system which currently sees only around 16% of graduates forecast to clear their debt before the end of the repayment period and 34% not paying back anything at all.
While graduates benefit from their degrees through higher earnings, the economy and society more broadly also benefit so it is right that the costs are split between the graduate and the taxpayer. However, the Augar review concluded that the pendulum had swung too far in the direction of the taxpayer, with the current estimate that 53p of every £1 loaned-out by the Government to pay for undergraduate degrees will never be received back.
Of Augar’s recommendations in this area, the Government have chosen to go with extending the repayment term to 40 years but have left the maximum fee unchanged, rather than following Augar’s suggestion of reducing this to £7,500. The impact of freezing this until 2025 is however effectively a reduction in fee in real terms given inflation is currently running at close to 8%. The reforms do go further than Augar in removing the real rate of interest on student loans full stop, whereas Augar recommended this just for the period whilst students are still studying (but suggested leaving the interest rate post-graduation as RPI plus up to 3%).
The extension of the repayment term to 40 years effectively means that graduates will still be paying back their debt as they approach the end of their career, if it is not paid off in full before that. There is a notion of fairness behind this in that it is assumed graduates will be benefitting from their degree financially throughout their career and so should pay back their borrowings throughout, not just for the first 30 years.
Those who were already paying off their student loan in 30 years (higher earning graduates) are not affected by this but for anyone who would previously have had some of their debt written off after 30 years (lower and middle earning graduates), the effect is to increase the total amount repaid. Reducing the threshold for starting payment also increases the total amount repaid as graduates start paying earlier and as their earnings grow, more of the salary is eligible to calculate monthly repayments – again this has little effect on the higher earning graduates but affects the middle and lower earners.
The net result of all the changes is that the taxpayer should now only end up footing the bill for 30p for every £1 lent out and around 45% of graduates will clear their debts in full, with only 15% now forecast not to pay anything back at all. Average graduate debt falls by £1,500 to just under £49,000. With the tuition fee unchanged, the Higher Education Institute (HEI) incomes are nominally unchanged (though as noted, inflation will cause the real value to fall causing HEIs to have to make less resource stretch ever further), it looks like graduates get lower debt, the taxpayer covers less of the costs and HEI income is at least nominally unchanged by these reforms.
However, analysis of the distributional impacts from London Economics and the Institute for Fiscal Studies (IFS) highlight the same conclusion: that reducing the repayment threshold, extending the repayment term and removing the interest rate has a largely regressive effect overall - high earning graduates will pay back less, while low and middle-earning graduates will pay back a lot more.
Male graduates who dominate in the highest earning deciles will see their total lifetime repayments fall by an average of £4,000 whereas female graduates will on average pay an additional £5,100. Male graduates in the lower deciles of the lifetime earnings distribution will see the largest increases in their total repayments as will females across almost all of the distribution (see Figure 1). On the flip side, male graduates in the top half of the distribution will see their repayments fall by £20,000+. The higher earning graduates see their repayments fall because of the removal of the real rate of interest on loans – they are able to repay a lot quicker and so are out of the system a lot earlier and with a lot less paid than would otherwise have been the case.
Under the current system the highest earning graduates pay back a lot more than they ever actually borrowed because of the interest accrued on their loans. Though it feels like this change should most benefit the worst-off graduates, giving them a lower overall debt, it’s the higher earners for whom this has a massive impact on their repayments. The opposite to the threshold reduction and term extension, the removal of the interest rate has a huge (beneficial) effect on the high earning graduates but does very little for the low and middle-earning graduates.
Notes: Based on London Economics analysis of the 2020-21 cohort of English domiciled students entering HE across the UK, EU-domiciled students studying in England, available here: https://londoneconomics.co.uk/wp-content/uploads/2022/03/LE-HE-Funding-Assessment-of-Augar-recommendations-03-March-2022.pdf.
While the whole system costs less than previously and the taxpayer pays less of the total, the extension of the repayment term and the removal of interest together mean that the burden of higher graduate repayments is completely shouldered by the low/middle earning graduates who pay a lot more, while the higher earning graduates pay a lot less. As such it is massively regressive.
That said, there was very little that the Government could do to change the parameters of the system that wouldn’t result in higher earning graduates paying less and lower earning graduates paying more, simply because the current system, for all its faults, has the feature that is very progressive – the highest earning graduates pay far more than lower earning graduates. Any change inevitably moves towards a system where middle and lower earning graduates pay more than they do now and higher earners pay less (as has been shown by the IFS simulator).
What does this mean for widening participation?
The Government’s own analysis suggests that amongst the lower/middle earning graduates who will pay back more, are many graduates from widening participation (WP) backgrounds, in particular those from disadvantaged households. So there is undoubtedly a disadvantage for WP of these changes. This broader issue though is less to do with the design of the system and more to do with the fact that WP graduates are more likely to end up in low/middle earning careers – that is, they currently do not have as successful higher education outcomes as some other graduates.
The repayment system could be tweaked to make it a better deal for those in the lower and middle part of the distribution and this would help WP efforts, but a much better long-term strategy for widening successful participation would be to tackle the structural barriers and inequalities in the system that result in poorer graduate destinations and labour market outcomes for WP students.
As forthcoming IPR research will show, graduates from lower socio-economic backgrounds and some minority ethnic groups are more likely to find themselves in non-graduate jobs post-graduation with negative consequences for their future earnings and career trajectory.
In the immediate term there may be an issue for WP to the extent that prospective WP students are put off attending because of the changed financial terms, and the headlines about lower and middle-earning graduates now paying more and for longer for their higher education. And while students may not have a clear view of where exactly they will likely end up in the earnings distribution, they may well realise that the middle deciles where the biggest increases in payments occur will include teachers, nurses, police and other public sector workers, meaning these occupations now cost more to pursue.
It’s not clear how much the additional payments for 10 years in 30 years’ time weigh in the balance of decision-making of prospective students, but recent research suggests that students feel the psychological burden of a debt that they feel they will never repay.
At the same time, research also shows that aversion to debt is socially graded – so the removal of interest from student loans, and the consequent reduction in total debt, may make higher education more attractive to those from less advantaged backgrounds, weighing positively for recruitment.
As was reported in the Augar review itself, research for the Department for Education has found that students would prefer lower interest rates and a longer repayment term even if it means paying back more in total, because of the negative psychological effect of seeing total debt increasing month-on-month when interest is applied, especially while still studying. So while the system may now be (a lot) less progressive, the removal of interest on student loans could actually see more students from disadvantaged backgrounds willing to enter HE and take on student loan debt.
It also has to be considered that the financial unsustainability of the current system means that if the terms were to be kept the same, then the Government may have looked to alternative measures – like a return to strict overall numbers controls reducing the availability of HE (more on numbers controls later…). This would likely affect those from disadvantaged and other WP backgrounds the most, restricting opportunity and stymying social mobility. At a time when we are about to enter a demographic boom of 18 year-olds, restrictions on numbers would have a particularly negative effect on WP.
The big missing piece of the jigsaw and potentially more important than anything else for WP students is the issue of maintenance support. Augar made a series of recommendations in this area that the Government has chosen to completely ignore. For example, Augar recommended a limited return of maintenance grants rather than loans and calculated that it would not make much difference fiscally to the Government (given the amount of maintenance loans that are effectively turned into grants through non-repayment) but could make a sizeable psychological difference to prospective students from poorer households.
But beyond the psychological issue of the framing of maintenance support there is a substantive issue around the value of the support available – this has been uprated with inflation to £9,706 but this ignores the fact that housing (rental) costs have risen much more than inflation squeezing the incomes of students receiving maintenance support. Moreover, fewer and fewer students are qualifying for full support because the threshold at which maintenance support availability starts to reduce has been frozen at a family income of £25,000 since 2008. If this had increased with average earnings it would be at £34,000 and double the number of students would be eligible for a full loan.
The bigger issue is that even a full loan does not adequately reflect the real costs that students face, with the last proper research on costs conducted eight years ago (2014 Student Income and Expenditure Survey) and the Government’s calculations of what student’s need to live computed by simply uprating the 2014 figures with inflation, ignoring the way housing costs have outstripped inflation, leaving the “full” loan entitlement short of the reality of living costs.
The inadequacy of maintenance support means that parental resources or part-time earnings have to top-up students’ incomes. Students from poorer backgrounds are therefore much more likely to end up working to supplement their inadequate finances, which limits their study time and increases the likelihood of lower attainment and a less successful transition into the labour market. The total failure to address the issue of adequate student support could be the biggest factor affecting WP to come out of the Government’s (non) response.
Ultimately, the outcome of the changes to fees and the financial architecture of the system for WP won’t be known for a number of years, but to the extent that prospective students care about the total size of their debt and the rate at which it grows, the freeze of tuition fees and the removal of real interest rates could see more applications from WP students than under the current system, despite the longer repayment term.
But the longer-term issue that hasn’t gone away is the absence of maintenance grants and more importantly the inadequacy of student financial support that weighs more heavily on those from less advantaged backgrounds. Addressing these things may have a much more important effect on HE access and success for disadvantaged students than any changes to interest rates and repayment terms.
The next blog will tackle the area that has generated a lot of reaction from the sector and from WP perspectives in particular - minimum entry requirements and student number controls.
All articles posted on this blog give the views of the author(s), and not the position of the IPR, nor of the University of Bath. Learn more about our research on widening participation in higher education.
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