The Minister of State for Universities and Science, David Willetts, has today announced the Government's proposals for higher education funding in England, in response to last month's publication of the Browne Review. Here we outline our initial response to this release. While the Government accepts a substantial part of the review's recommendations, including a higher fee and repayment threshold, it has put forward alternative proposals for student support and interest charges that are more complex, which risk compromising transparency as well as increasing the administrative burden. The key differences compared with Lord Browne's proposals are:

• Tighter means testing of grants (which saves the taxpayer money);
• Increasing interest rates for higher earning gratuates and reducing them for lower earning graduates (which makes the system more progressive, more complicated and lower cost to the taxpayer than that proposed by Browne);
• Making the maintenance loan system much more complex and more generous (which increases the taxpayer burden from Lord Browne);
• Increasing the funding for universities charging fees above £6,000 a year (costing the taxpayer more money compared to Lord Browne).

IFS researchers will release a more comprehensive reaction to this announcement, including distributional analysis and the balance of contributions, in due course.

Fees

The biggest single announcement was a cap on annual tuition fees of £9,000 per year (which was not recommended by Lord Browne). In return for preventing universities from charging more than this, the Government will not impose a levy on fees above £6,000 per year. Instead, universities wishing to charge more than this will be required to intensify their efforts to widen participation in collaboration with the Office for Fair Access. Universities would be free to charge less than £6,000 a year, but are extremely unlikely to do so as on average, they would need to charge £7,000 a year just to replace the lost income from teaching grants.

Graduate Repayments

On the system of repayments, the Government agrees with Lord Browne on the idea of a 9% repayment rate on earnings above £21,000 a year, and in principle agrees with the idea of uprating this threshold to reflect real average earnings growth. While this form of indexation is more expensive to the taxpayer than the current indexation (by inflation), it is also more progressive as it prevents the number of low-earning graduates being liable for repayments from growing over time.

There are important changes elsewhere. The Government proposes a higher maximum interest rate and a different way of tapering it. Instead of a capped real interest rate for lower-earning graduates to ensure that their debt does not increase in real terms, there would be a real interest rate applied linearly over the salary scale, from 0% at £21,000 a year to a maximum of 3% at £41,000.

While the maximum interest rate is higher than under Lord Browne's proposals, this taper is more progressive: graduates earning between £21,000 and roughly £35,700 a year would face a lower rate of interest (assuming an initial debt of £30,000). However, an interest rate that explicitly depends on earnings is more complex and it is not clear how this would be implemented, nor which measure of earnings would be used to calculate a graduate's interest rate, which could add to administrative burdens.

The prospect of a real interest rate has led to concerns about whether graduates from wealthy families may repay their loans more rapidly in order to reduce their total interest payment. In response to this, the Government has proposed an early repayment levy to discourage individuals (particularly high-earners) from making extra payments. While higher interest rates will increase the incentive to make larger repayments, the terms of the loan remain more generous than alternative commercially available sources of finance. For those facing a 3% real interest rate, the Government benefits from ensuring that these graduates take longer to pay their debt back. Hence discouraging early repayment would save the taxpayer money.

Upfront Support for Students

Today's announcement included changes to the package of upfront support currently received by students. Students from the poorest families (with household income at or below £25,000) will be better off, in terms of upfront support, by around £700 per year compared with the current system. This is due to increases in the generosity of maintenance grants and loans. The government will save money by cutting maintenance grants back for those from higher income families - the maximum parental income at which a grant is payable has been reduced to £42,600 (currently £50,000 and proposed to be £60,000 by Browne). Overall, the total amount of upfront support is more generous than the Browne recommendations for student with household incomes below £37,500, and less generous for students with household incomes above this.

Contrary to Lord Browne's welcome recommendation of a universal maintenance loan, the current system of means-tested maintenance loans will continue, with a series of complicated tapers to determine the proportion of support payable in the form of grants and loans.

Maintenance grants of £3,250 a year and maintenance loans of £3,875 a year will be payable to all students from households with annual income up to £25,000. Those with household incomes above this amount will then see the loan element of their support package increase and the grant element decrease with income, until household income reaches £42,600. Then as household incomes increase above £42,600, the total amount of support payable (purely in the form of loans) decreases until household income reaches £62,125. At and beyond this household income level a universal maintenance loan of £3,575 will apply. These changes will significantly increase the administrative burden of applying for and administering loans compared to Lord Browne's proposal. While there is a strong case for making maintenance grants for students depend on parental income, it is much harder to argue that graduate debt and therefore future graduate contributions should be related to parental income rather than just the course chosen and how much the graduate subsequently earns. In particular it is hard to justify why students from households with incomes of £42,600 should face larger debts than all other students doing similar priced courses. We agree with Lord Browne's preference for a simpler and more transparent system involving a universal maintenance loan and means-tested grant; this would be easy to devise and merits reconsideration.