IFS report – analysis of the English HE funding reforms announced in the July Budget

The Institute for Fiscal Studies has just published its analysis of the HE funding reforms that were announced in the Budget on 8 July.

It has modelled the distributional impact on graduates repayments of the three changes proposed to undergraduate financing:

• converting maintenance grants to loans for those commencing undergraduate study in 2016/17;
• freezing the loan repayment threshold at £21 000 from 2016 rather than increasing it in line with average earnings (as was promised to those who started back in 2012 and after);
• increasing the maximum undergraduate tuition fee in line with inflation from 2017/18 for institutions which can demonstrate high ‘quality’ teaching.

Of these three, only the first is confirmed, with the other two proposals going out to consultation shortly. Regarding the second, the likely scope of the consultation is probably restricted to whether the freeze should be applied retrospectively to all who have faced higher tuition fees since 2012, ie existing borrowers, or only apply to those starting in 2016/17 and later, new borrowers.

IFS take each of the three measures in turn and model it before assessing the combination of all measures for a hypothetical cohort of 360 000 students starting in 2016/17. This is a change from recent IFS practice where analysis had centred on the 2012/13 cohort (as per their work for the recent Universities UK Student Funding Panel) and therefore elides the retrospective effect of the repayment freeze.

The IFS document also discusses possible changes to the discount rate – which is to be reviewed by the Treasury. IFS describe any reduction – which they see as most likely – as a ‘trick’ since it would not affect future repayments in cash terms, only how those projected repayments are valued today (or 2016). Although IFS do not spell this out, the discount rate is a matter specific to Business, Innovation and Skills, rather than government: it determines how loans feature in departmental budgets and accounts. I will discuss  their analysis of the discount rate in more detail in a subsequent post.

Converting Maintenance Grants to Maintenance Loans

Regarding the first measure (abolishing maintenance grants), IFS note that ‘The poorest 40% of students going to university in England will now graduate with debts of up to £53,000 from a three-year course, rather than up to £40,500’. In return for an extra £766 per year in cash while studying.

While they believe that that the future loan repayments of two thirds of those students will be little affected by this change, high earners coming from poorer backgrounds will now repay for longer with ‘the average individual contributing an extra £9,000 towards the cost of their degree’ in net present value terms.

That’s before the second measure – freezing the repayment threshold – is factored in and for those outside London. IFS only model the impact on students who live ‘away from home outside London’ for three years. Those studying full-time in London will be able to borrow higher rates of maintenance loan. Those taking out their full entitlement of loans will have a commencing debt of c. £60 000 and higher earners graduating from London courses would then likely face even higher repayments.

Freezing the Repayment threshold

IFS conclude that freezing the repayment threshold for five years from 2016 is the most significant measure (after 2021 they model an increase in line with earnings; an alternative increase in line with inflation is modelled in a technical appendix).

For the 2016/17 cohort this would boost projected repayments going to the government by £1.4billion (2016 NPV terms) over the lifetime of the loans.

Graduates would see their repayments increase by £3,800 on average This is a substantial increase in cost and one that does not fall progressively: a median lifetime earner (‘earning around £23,000 per year in their early 20s, rising to £34,000 in their early 50s, both in 2016 prices’) would see an increase in repayments of £6 000:

£27,000 in 2016 money in total under the revised 2016–17 system, compared with £33,000 in total in 2016 money under the system with a threshold freeze.

For those who started between 2012 and 2015, such an impact would represent a sizeable retrospective price hike on what they were promised before signing up to a loan agreement. The IFS modelling for last month’s Universities UK report in fact shows higher increases in repayments for those in the middle lifetime earnings deciles of the 2012 cohort (see image in this blog post) though they have since revised assumptions about future earnings.

Participation

IFS save most of their comment in the press release for the effects on participation. Compared to the 2012 reforms, the measures outlined by George Osborne are regressive – one affects those coming from the poorest backgrounds adversely; the second affects median earners hardest. IFS note that this breaks with the 2012 design.

Commenting on the analysis, Jack Britton, Research Economist at the Institute for Fiscal Studies (IFS), said:

The 2012 reforms appear not to have had a negative effect on higher education participation amongst full-time students from poorer backgrounds. This likely reflected the fact that the system was designed to protect both that group and those with low expected lifetime earnings. Only time will tell whether these new changes will be similarly benign in their effect.

The report spells this out more fully.

Full-time participation rates amongst students from poor backgrounds did not fall following the major changes to higher education finance introduced in 2012, but the changes introduced in 2012 differ significantly from those due to be introduced in 2016–17.

In 2012, grants went up for the poorest students (by 10%) and the net present value of loan repayments went down for those in the bottom 30% of lifetime earnings (in which those from the poorest families are likely to be over-represented).

Under the 2016–17 system, grants have been abolished and the net present value of repayments is likely to increase substantially for those from the poorest backgrounds. We would expect both of those changes to have negative effects on participation for the poorest students, all else equal.
(my emphasis)

BIS sent me an unsolicited press statement on this particular matter. In its entirety:

The IFS recognises the reforms in 2012 did not deter students from going to university and in fact applications from disadvantaged students are at a record level. With the lifting of the student number cap we are confident that thousands more students will be able to benefit from a higher education.

BIS does not dispute the conclusions that the greater share of the change in costs from these measures falls where the IFS analysis indicates.

It remains to be seen how vice-chancellors and university managers will respond to this IFS analysis. The recent Student Funding Panel suggested freezing the repayment threshold but evaded direct discussion of the distributional impacts. It also choose not to ask their convened focus groups or questionnaire-fillers whether changing the repayment threshold for existing borrowers was acceptable.

One vice-chancellor told the Independent this weekend that she supported the plan to scrap maintenance grants before outlining that reductions in tuition fees were a bad idea.

People at the Institute for Fiscal Studies have said that [eliminating tuition fees] would be regressive, haven’t they? And who am I to argue with their financial analysis?

I’m sure the vice-chancellors, like BIS, will be finding ways to avoid this latest analysis, but they do need to come out now against a retrospective price hike for those already with loans.