Public cost of student loan system 'highly uncertain'

Published on Thursday, 24 April 2014 09:46
Written by Govtoday staff

The government's 2012 reforms to higher education funding in England now look like they will do little to reduce the total taxpayer contribution per student. However, this depends fundamentally on what happens to graduate earnings over the coming decades.

In fact, the main impact of the reforms on the public finances has been an increase in uncertainty. Teaching grants (a certain cost to the government in the short run) were replaced by substantially larger tuition fees and an accompanying increase in student loans (the public cost of which is highly uncertain).

Since the long-run public cost of student loans depends on the earnings and repayment behaviour of graduates for many years in the future, the government will not know for decades whether the 2012 reforms have saved taxpayers any money. This is the main finding of new IFS research published today and funded by Universities UK, with additional support from the Nuffield Foundation and the ESRC Centre for the Microeconomic Analysis of Public Policy at IFS.

The research focuses on the cohort of young English full-time undergraduate students who started university under the first year of the new HE finance regime introduced in autumn 2012. Under our baseline assumptions:

  • For each £1 loaned out to cover tuition and maintenance costs, the average long-run cost to the government is estimated to be 43p. (This figure expressed in percentage terms is sometimes referred to as the 'RAB' charge.) We estimate that the average amount lent to each student is just over £40,000 in 'net present value' terms, meaning that the average loan subsidy amounts to just over £17,000 per student.
  • Adding in other sources of government spending on undergraduates over the duration of their course (such as teaching grants to universities and maintenance grants to students) increases the total taxpayer contribution per student to just over £24,500. At around £7,600 per year of study (the average course length is 3.2 years), this is slightly more than the average £6,000 that government spent per secondary school pupil in 2012–13.
  • This estimated total taxpayer contribution is only 5% (around £1,250 per student in 2014 prices) less than we estimate it would have been under the previous system of tuition fees and loans that was in place up to 2011−12. However, universities are now receiving around 25% more funding per student for teaching from the combination of tuition fees and teaching grants than they did under the old system.

These estimates are extremely sensitive to assumptions about what happens to graduates' earnings over the next 30 years. For example:

  • Our baseline estimates assume that earnings grow in line with Office for Budget Responsibility (OBR) forecasts from December 2013. If instead earnings were to follow the more optimistic path forecast by the OBR in March 2012, the estimated average long-run cost to the government would fall to 34p per £1 issued, rather than 43p.
  • Using the more optimistic March 2012 earnings forecasts, we estimate that the total taxpayer contribution would be 15% (around £3,700 per student in 2014 prices) lower under the new HE funding regime than under the system that was in place up to 2011–12 (compared with 5% using the more pessimistic earnings growth forecasts from December 2013). What happens to graduate earnings over the next 30 years therefore matters hugely for whether, and how much, the new system saves the government money.

Increases in fee levels or student numbers would both increase our estimates of the long-run public cost of issuing student loans. For example:

  • Assuming students borrow more from the government in order to cover any increase in fees, we estimate that a rise in all fees of just £500 (from the average of around £8,600 estimated for our cohort in 2012) could raise the taxpayer contribution under the new system to the same as under the old one.
  • In the 2013 autumn statement, the government announced that it would lift the cap on student numbers and estimated that this would mean an extra 60,000 students going to university each year. Assuming that these extra students go on to have earnings in the bottom half of the graduate lifetime earnings distribution, issuing student loans to these students over the duration of their courses would cost the government an additional £1.7bn.

If the government wanted to reduce the loan subsidy under the current system, it could increase the repayment rate, reduce the repayment threshold or extend the repayment period. Each of these would tend to increase the repayments made by middle-earning graduates. Alternatively, the government could choose to raise the interest rate charged, which would only affect high-earning graduates.

Wenchao Jin, a research economist at IFS and one of the authors of the report, said "The public cost of the student loan system is highly uncertain. It depends on graduates' earnings and repayment behaviour many years into the future, which we - and the government - can only estimate. Our baseline estimates now suggest that the total government contribution per student has fallen slightly as a result of the government's reforms, but that even a small real increase in fees would wipe out these gains. Whether these reforms have reduced the taxpayer subsidy will remain unknown for many years to come."

Rowena Crawford, a senior research economist at IFS and another author of the report, said: "The government's changes to the higher education finance system have not reduced the total taxpayer contribution per student substantially. The net effect on the public finances is primarily an increase in uncertainty, with the certain cost of teaching grants replaced by the uncertain costs of providing student loans.

"If future graduate repayments come in lower than expected, then a future government will have to accept higher-than-expected levels of public sector debt, or offset this by increasing taxes or cutting spending either on higher education or elsewhere."

Source: IFS

Add comment