Skip to main content

Payback Time?

Most graduates will still be paying off student loans into their 50s, new research shows.

Nearly three-quarters of students will fail to clear their student loans before they are written off after 30 years, and the large majority will still be paying off their loans well into their forties and early fifties, according to new research.

Claire Crawford, assistant professor in the Department of Economics at the University of Warwick and research fellow at the Institute for Fiscal Studies (IFS), and Wenchao Jin, research economist at IFS, conducted the analysis, which sets out in detail for the first time the full implications for graduates of the new student loan system that accompanied the higher tuition fees introduced in 2012.

The report, “Payback Time? Student Debt and Loan Repayments: What Will the 2012 Reforms Mean for Graduates?”, was funded by The Sutton Trust, a foundation dedicated to improving social mobility through education, and undertaken through IFS, an independent research organization that specializes in taxation and public policy issues.

Most graduates will face higher repayments, but the lowest earners will pay back less.

The reforms introduced in 2012 increased the cap on undergraduate tuition fees for UK and EU students from £3,375 to £9,000. At the same time, teaching grants paid directly to universities by the government were scrapped for most students.

Students are entitled to borrow the full amount of these higher tuition fees from the government at subsidised interest rates, which they repay at a rate of 9 percent on all income above a repayment threshold (increased from £15,795 under the old system to £21,000 under the new system).

The report shows the consequences of these changes. Crawford and Jin find that the typical student will leave university with more than £44,000 in debt under the system of higher fees and interest-bearing loans introduced in 2012 – £20,000 more than under the system it replaced.

After allowing for inflation and anticipated earnings growth, the report shows that they will pay back an average of £35,446 in today’s prices, compared with £20,936 under the old system, or an additional £14,510.

Average annual repayments will be lower under the new system than under the old system, because of the higher threshold above which loans must now be repaid. But because graduates will be repaying their loans for longer under the new system, they will end up repaying substantially more per year later on in their careers, after they would have repaid their loans in full under the old system.

“The new higher education finance system will leave graduates with much more debt than before, but the effects of the changes will be quite different for different people and at different parts of their lives,” Crawford said. “Graduates who do less well in the labour market will actually end up paying back less than before, while middle and high earners will pay back much more.

Almost three-quarters of graduates will not earn enough to pay back their loans in full.

“In that sense, the system is more progressive and looks in many ways rather like a graduate tax. The size of the repayment threshold also means that graduates will generally pay back less during their twenties but much more later in their careers, especially when they are in their forties. Remarkably, almost three-quarters will have some debt written off 30 years after graduating.

“Our estimates suggest that the reduction in teaching grants has been more than offset by the increase in tuition fees we have seen under the new system, meaning that universities, on average, have seen an increase in the funds they receive to teach undergraduate students. The new system has therefore secured an increase in resources for universities by increasing the contributions made by mid to higher earning graduates later in their careers. Whether you think these reforms are an improvement on the previous system thus depends on how you weight these different priorities.”

Graduates will typically be repaying their loans for longer under the new system. Under the pre-2012 system, half of all graduates would have repaid their debt in full by the age of 40. Only 5 percent will do so in the new system. In fact, under the new system, 73 percent of all graduates will not have repaid their debt in full by the end of the repayment period, meaning that they will still be making repayments into their fifties.

In part this is because graduates in their twenties will be paying slightly less than under the old system. Payment will be delayed because the earnings threshold has been raised. This means that those with average yearly incomes of less than £28,000 are likely to pay back less in total under the new system as a result of the higher earnings threshold.

The researchers estimate that a middle-earning graduate – someone whose annual earnings are higher than half of all graduates (including those out of work) at each age – will still owe around £39,000 at today’s prices by the age of 40, and will have to pay back around £1,500 a year throughout their forties. Even by age 50 they will still owe around £32,000, though any remaining debts will be written off one year later.

A typical teacher (who is in work each year and earns the average earnings among teachers at each age) will still owe around £37,000 at the age of 40 and will be expected to repay £1,700-£2,500 a year throughout their forties and early fifties. Under the previous system, a typical teacher would have paid off their debt by age 40.

In the coming weeks, Crawford and Jin, together with Rowena Crawford, an IFS senior research economist, will publish a complementary report in which they analyse the financial consequences of these reforms for the public purse. This will include an assessment of the magnitude of the public subsidy inherent in the student loan system.

comments powered by Disqus