Students aiming for high-paying graduate jobs will save £20,000 in loan repayments if they delay entering university, according to new analysis from the Institute for Fiscal Studies, while middle-income earners will have to pay £30,000 more over their lifetime.
The IFS analysis highlights how government changes to student loans in England, which come into effect next year, have dramatically tipped repayments in favor of the highest-earning graduates.
Students taking courses such as medicine, economics and law, which can lead to lucrative careers, would benefit from taking out loans under the new format from September 2023, due to lower interest rates.
In contrast, students who plan to take lower-paying jobs are expected to enroll in undergraduate courses this year to take advantage of loan cancellations occurring after 30 years rather than 40, and a higher starting income. high before having to make refunds, under the government’s changes.
“For students leaving school in 2022, this means that incentives to take a gap year will crucially depend on their expected future earnings,” the IFS noted.
Ben Waltmann, senior research economist at IFS, said: “Student loan reform will reduce the cost of loans for the taxpayer and the highest earners, while borrowers on the lowest incomes will pay significantly more.
“How much more exactly is inevitably uncertain, but our best estimate is that lower middle earners from the 2023 entry cohort face the highest additional cost at around £30,000 over their lifetime.
“The eventual impact of the reform is extremely uncertain and will depend on economic developments and government policy in the decades to come.”
According to the IFS model, graduates in the lower average lifetime income bracket would earn between £33,000 and £36,000 by the age of 30, in today’s money. The highest earners would be those of the top 30%, with incomes of £50,000 or more by the age of 30.
The IFS said government changes – announced in Chancellor Rishi Sunak’s spring statement – removed progressive elements from the system introduced in 2012, describing the policy as “moving away from a system that redistributes strongly from top to bottom. earn graduates.
Larissa Kennedy, president of the National Union of Students, described the changes as “calculated cruelty” at a time when the cost of living was skyrocketing.
“Ministers are burdening young people with an unimaginable debt for the next 40 years of their lives. It’s nothing more than an attack on opportunity,” Kennedy said.
Under the current system, loans for high-income graduates have interest rates set by the retail price index (RPI) plus 3%. However, the changes mean that only the RPI rate will be used to set interest rates.
“Under the new system, most will simply pay back what they borrowed, no more, no less. It moves us away from something that looks a lot like a tax on graduates to something for which the term ‘student loan system’ is much more appropriate,” the IFS said.
For most graduates, the 2012-era loan system was to repay 9% of their earnings beyond the repayment threshold for 30 years, regardless of their total debt load. Under the changes, with a repayment period of 40 years, IFS expects more than 70% of graduates to repay their loans in full.
The IFS has also drawn attention to a little-noticed change to how the starting point for refunds will be calculated.
Graduates currently make repayments on their earnings above £27,295, with the threshold being raised each year based on average earnings growth. After the government changes, the threshold will increase more slowly, based on RPI rates – which the IFS alone will cost middle-income graduates more than £10,000 in higher repayments over their lifetime.
“It is somewhat worrying that such a significant change was not mentioned at all in the press materials announcing the reforms,” the IFS said.
The changes also make “the system of funding higher education in England even more internationally aberrant” by using lower public spending than most other developed countries to support higher education, the economists said.