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‘Estimating the public cost of student loans’: Four points, three omissions and an oddity

  • 24 April 2014

The new report on Estimating the public cost of student loans authored by the Institute for Fiscal Studies and sponsored by Universities UK is an important and detailed piece of work. Let me try and explain why.

Point 1: It confirms the Government’s warnings about the inherent sensitivities in calculating a RAB charge (for both past and present students) – though it goes on to put the loan subsidy for English-domiciled students in the 2012 cohort at a precise 43.3p in the £.

Point 2: It rightly points out that student loans in England continue to enjoy a generous interest rate subsidy, which is often forgotten. Although graduates with high earnings will face an interest rate of RPI+3% (along with current students), other graduates will not.

Point 3: It confirms that the resources available for teaching each undergraduate have increased (from £22,143 to £28,250 on average) – a figure policymakers will no doubt throw back at the HE sector when it lobbies for an increase in the £9,000 fees cap in the run up to the next general election.

Point 4: One of the quirks in the recent row about the increase in the RAB charge was that it quickly fused into a debate about whether fee caps should go up to help pay for the system – Cathy Newman grilled David Willetts on this on Channel 4 News before tweeting about a private conversation with him on this very topic. But, as this report also confirms, higher fees mean an even higher RAB charge, all other things being equal. So they do not, on their own, offer any solution to increases in the RAB charge.

Omission 1: One really significant omission is part-time students. As we have reported elsewhere, no one is at all clear what the RAB charge for part-time student is: some people think it is higher than for full-time students; and others think it is actually positive, meaning the Government make a profit from lending to part-time students. It would have been great to have had the IFS wade into this debate but it is not to be.

Omission 2: One of the alternative policy options offered by the IFS for reducing the RAB charge is to tinker with the interest rate – or rather to increase it substantially to a maximum of 5 per cent. Given that Labour’s policy of reducing undergraduate fees to a maximum of £6,000 was originally costed on the basis of a higher interest rate for higher earners, this is certainly worth modelling. But increasing interest rates may not fall in to the same category as the other options modelled because it may be harder to do due to consumer credit rules. There is no mention in the report of the potential policy consequences in terms of consumer credit regulation of raising the interest rate on student loans so that they no longer look like such a low-cost financial product.

Omission 3: Alongside modelling interest rate changes, the IFS have modelled other alternative loan parameters to see what difference they would make to repayment rates. These include a different repayment threshold. Sadly, the IFS haven’t considered the Australian option of levying repayments on the total taxable income for those who earn above the repayment threshold, rather than only on income above the threshold as we do – a policy considered in two HEPI reports published today comparing student loans in England and Australia.

Oddity: The IFS press release includes a comparison between the costs to taxpayers of a secondary school place and an undergraduate place. There are numerous valid comparisons to be made between schooling and higher education – I have tried to draw some out in the latest edition of the Higher Education Review. And comparing the costs of different stages in the education system is certainly a valid thing to do in theory. But taxpayers pay for the teaching of secondary school pupils, not their board and lodging, whereas they contribute to the teaching and living costs of undergraduates. So a straight comparison is just not comparing like-with-like in any meaningful way. (Of course, taxpayers do sometimes contribute via the benefits system to the board and lodging of school pupils but this is not part of the IFS calculation.)



  1. Julian Gravatt says:

    The other omission in the IFS report is on fee levels. IFS only look at the costs of loans for the 2012 cohort but make an implicit assumption that the “average levels of fees, maintenance loans and grants are kept constant in real terms” (page 20) before looking at assumptions about real-terms earnings growth or other policy changes.

    An obvious (but unfortunate) way for a future government to reduce the future cost of future student loans will be to fix the fee cap, fee loans and maintenance loans at current levels (eg £9,000). This would be a cut in real-terms but would be another form of fiscal drag, Many other public services have been operating on a no-inflation policy for several years so it would not be unusual to do this in higher education.

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