An introduction to student finance in England

The Government plans to publish a conclusion to its review of post-18 education and funding in autumn 2021. It’s widely expected this will propose the largest changes to student finance since 2012.

The current student finance system in England is mostly made up of publicly supported student loans.

Many elements of the system are complex, potentially confusing and descriptions can be filled with jargon. Potential students need to understand the system, as do those contributing to the debate about reforming student finance.

This is the first in a Library series looking at the undergraduate student finance system in England. It summarises the current system, looks at the important players and the main financial flows between them.

This is not detailed guidance for prospective students, who should look at the Government’s official guide.

Potential reform to the system

The Government’s conclusion to the post-18 education review will include a response to the Augar Review recommendations on student finance. These recommendations included cutting fees, reintroducing grants, reducing the repayment threshold, cutting the interest rate on loans while studying and extending the duration of loans.

Given the state of the public finances due to the pandemic, it’s likely that any changes to student finance proposed by the Government will have to result in major savings.

How does the current student loan system work?

Students can take out one loan to covers fees and another to contribute to their living (maintenance) costs.

The Student Loans Company (on behalf of the Government) pays fee loans directly to higher education institutions and maintenance loans to students. Once the money is borrowed there is no distinction between the two types of loans in terms of liability or repayment.

Separate to this, the Government makes direct teaching payments to universities, which are linked to specific priorities, such as high-cost subjects and supporting disadvantaged students. This funding is worth £1.3 billion a year to universities, compared to £10.0 billion in income from fee loans.

How are repayments made?

After completing their courses, students (now graduates) become liable to repay their loans. They start paying from the April after they leave university – known as the statutory repayment date.

Payments continue until either their total loan (plus interest) is repaid or after 30 years, when any unpaid loan is written off. The Government expects that only 25% of current students will repay their loan in full.

Repayments are only made when the borrower’s income is above the repayment threshold; currently £27,295 a year. Those who earn more than this threshold repay 9% of any income above this level.

Interest is charged from when loans are taken out. Interest rates vary from the Retail Prices Index (RPI – a measure of inflation) to RPI+3%:

• While studying and up to the statutory repayment date, they incur RPI+3%
• After the statutory repayment date, if they earn below the repayment threshold they pay RPI But if they earn above the repayment threshold, they pay RPI+0 to RPI+3%, depending on income.

How much do student loans cost?

The economic cost of the system to the public sector or ‘the taxpayer’ is the difference between the amount lent to a cohort of students and the value of their repayments as graduates. This is known as the RAB charge.

The Government’s forecast for the 2020-21 financial year is that this will be 53% of the amount lent. It implies the ultimate cost of student loans for full-time undergraduates in 2021/22 will be around £9.3 billion. These estimates are uncertain and frequently revised.

Student loans are therefore different from a conventional personal loan, as:

• Repayments are income-contingent, not a set fraction of the loan.
• They are written off after a specified duration
• Repayments do not cover the amount borrowed overall despite the interest charged. They operate at a ‘loss’ that the taxpayer is liable for. This is largely due to the high level of the repayment threshold compared to graduate earning.
• Changes to loan terms can be made retrospectively.

Many commentators and the Augar Review have said that the term “student loans” is misleading, and it is really a graduate or student contribution system.

Who is involved in the system?

Students can take out loans to cover their tuition fees. They are also eligible for maintenance loans, the size of which depends on several factors, including household income, where they study and where they live. Most students have to partly fund maintenance costs from other sources, including parental contributions, savings, part-time work and support from their university.

The public sector pays maintenance loans to students. It pays fees loans to universities on behalf of students and directly funds universities. It receives loan repayments from borrowers. Ultimately, the public sector is liable for the difference between what is lent and what is repaid.

Universities receive payment for tuition via fee loans plus direct funding from the public sector for specified elements of teaching and direct research funding.

Graduates or ‘borrowers’ Make loan repayments when they earn enough. Currently they are liable for repayments over 30 years. Generally, they earn more than non-graduates and pay more tax, but there is considerable variation within the graduate population.

Other articles in the series

How much do graduates pay back? also gives more detail on current financial transactions and repayments from graduates.

The rest of the series looks at:

• The impact of increasing the loan interest rate
• Impact of lowering the repayment threshold
• Impact of reducing the fee cap
• Extending the loan term and increasing the repayment rates
• How much would it cost to bring back grants?

About the author: Paul Bolton is a statistician at the House of Commons Library, specialising in higher education.

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