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Home Publications Higher Education finance reform: Raising the repayment threshold to £25,000 and freezing the fee cap at £9,250

Higher Education finance reform: Raising the repayment threshold to £25,000 and freezing the fee cap at £9,250

Chris Belfield, Jack Britton and Laura van der Erve
Briefing note

On Sunday, the Prime Minister Theresa May announced that the income threshold above which graduates start making repayments on their student loans would be increased from £21,000 to £25,000 for all those who started university after 2012, and that the cap on tuition fees at English universities would be frozen at its current level of £9,250.

Key Findings

  • Increasing the repayment thresholds on student loans to £25,000 and removing the cash-terms freeze until 2021 is a significant giveaway to graduates. This reduces average graduate lifetime repayments by around £10,000. These benefits are greatest amongst those in the middle of the graduate earnings distribution, with some benefiting by up to £15,700 as a result of the changes. This reform increases the cash in pocket of graduates, with all those earnings more than £26,500 making annual repayments £500 lower in 2020 in cash terms. Now 83% of graduates are forecast to not fully repay their loans within the 30-year repayment period (up from 77%).
  • Freezing the cap on tuition fees at £9,250 has little impact in the short-term, but has potentially significant implications if kept in place in the long-run. This reduces the forecast average debt on graduation for students starting a three-year degree this autumn, from £50,600 to £49,800. However, as most students do not pay off the full value of their debt this only reduces the repayments of the highest earning graduates.
  • These reforms will increase the long-run government contribution to the cost of providing higher education by around £2 billion per year (raising the repayment threshold costs £2.3 billion and freezing fees saves £0.3 billion) This increases the RAB charge on student loans from 31% to 45% for students starting in 2017. This is entirely due to the reduced graduate repayments as a result of the higher repayment threshold (freezing fees slightly reduces the RAB). However, the impact on the deficit (PSNB) will be negligible in the short-run because student loans do not impact the deficit until they are written off after 30 years.
  • Freezing the cap on tuition fees with no compensating teaching grants directly reduces university funding. Again, the impact is small in the short-term but this will grow the longer a freeze is kept in place. This raises questions about the introduction of the Teaching Excellence Framework and creates uncertainty about the long-run path of university funding. The freeze appears to continue a historical trend that higher education funding per student has consistently been characterised by gradual real terms falls over a number of years punctuated periodically by relatively sharp increases following large-scale reforms.