75% of Students Will Never Pay Off Student Debts

Research by the Institute for Fiscal Studies released today has concluded that 75% of students will still be saddled with university debts after the age of 50.

The IFS’s damming report focuses on the effects of recent changes to student funding on the long term prospects of graduates, the public purse and universities.

The report concludes that replacing maintenance grants with loans has reduced the government deficit, but has resulted in students from low-income families graduating with the highest debt levels, in excess of £57,000.

On the plus side, changes since 2011 have:

  • Reduced annual government borrowing in the short run by nearly £6 billion.
  • Reduced the long-run cost to the taxpayer of HE by around £3 billion a year.  The expected long-run cost is now £6 billion a year.
  • Increased university funding by about 25% per student relative to the 2011 system. Universities now receive an average of £28,000 per student per degree.

On the other hand, the report concludes that the design of the current system creates some problems:

  • The debts with which students graduate are so large that around three-quarters are likely never to pay them off in full. This means that most will still be paying off student debt as they enter their 50s, that incentives for universities to provide high-quality courses in return for the money they receive are surprisingly limited, and long-run savings to the public finances are lower than short-run savings.
  • Interest rates on student debt are very high – up to RPI + 3% (equal to 6.1% in March 2017). This further increases students’ debt levels. The average student accrues £5,800 of interest while studying, meaning that they borrow £45,000 but find on the day of graduation they have a debt of £50,800. However, it only affects the repayments of higher earners, who could end up paying £40,000 in interest payments. This could make the system more progressive but it also increases the incentive for those who expect to earn a lot to pay fees up front or pay off the debt early.
  • Replacing maintenance grants with loans means that students from the poorest families could graduate with student debts in excess of £57,000 from a three-year degree. Other students, not eligible for the additional maintenance loans, will graduate with debt of £42,500. The new maintenance loans resulted in more cash in pockets for poor students than the grants they replaced. However, university bursaries have become less generous and so total up-front support has remained almost unchanged since 2012.
  • Reforms since 2012 impact the repayments of middle- and low-earning graduates the most as a share of their total income. The repayments of the poorest third of graduates have increased by 30% while the repayments of the richest third have increased by less than 10%. This is primarily the result of the cash-terms freeze in the repayment threshold at £21,000 and goes some way to unwind the increase in progressivity which resulted from the 2012 reform.
  • Low-cost arts and humanities subjects got much bigger increases in funding than high-cost science and engineering subjects. The lowest-cost subjects attracted 47% more income per student in 2017 than in 2011 while the highest-cost subjects only attracted 6% more income. This increases incentives for universities to provide degrees in subjects where economic returns are known to be lower on average. This could turn out to be a major and costly distortion to the way we fund higher education.

Jack Britton, an author of the report, said “Recent policy changes have increased university funding and reduced long-term government spending on HE while substantially increasing payments by graduates, especially high-earning graduates. There is probably not much further to go down this route, but proposals for reducing student fees tend to hit the public finances while benefiting high earners the most.”

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