Abolishing student grants and raising fees above £9,000 heaps more debt on poorest students

There were a surprising number of announcements relating to higher education in George Osborne’s budget this week. One of the most controversial was the announcement that university maintenance grants for lower-income students in England and Wales are to be scrapped from September 2016 and replaced with loans. The £9,000 annual fees that universities charge students will also be allowed to increase by inflation for those universities “offering high teaching quality”.

These moves could harm access to university and are a concern on the grounds of equity and efficiency. While poor students will have slightly more money in their pockets when they get to university, after the chancellor raised the amount of maintenance loan they can borrow, they will graduate with more debt.

Grants currently stand at a maximum of £3,387 per year for students with parental incomes of £25,000 or less. This was on top of £4,047 in maintenance loans, so their full package amounted to £7,434. These students will now be able to borrow £8,200 in maintenance loan support if they live outside London, meaning on a cash basis they are £766 better off. However, they will graduate with an additional £4,153 in debt. This means that the poorest students will now graduate with the biggest debts.

It is, at first glance, hard to follow the chancellor’s logic here. It is widely known that somewhere around 45p in every £1 the government lends to students will be subsidised by the government, since students themselves don’t repay all of their loans or cover the full cost of borrowing to government. So, extending loans to poor students may not save the exchequer much. And, under the fair assumption that lifetime earnings are correlated with parental household income, the proportion of these loans that will be written off is likely to be higher than average.

However, the chancellor may have other intentions here. While increasing student loans will impact debt, they have a smaller impact on the deficit than student grants – which are pure expenditure that will not be paid back. So removing grants will reduce the deficit, something the chancellor is always keen to do – even via what amounts to an accounting trick.

Bad omen for access

The potential impact of these changes on students is an under-researched area. However, there is a small amount of evidence that can help us to understand the likely consequences. Myself and colleagues studied the impact of the previous move to abolish grants, by Tony Blair’s Labour government in 1999. Throughout the 1990s, grants were slowly phased out, then finally abolished in 1999 (alongside the introduction of the first tuition fees), only to be re-introduced in 2004.

Our analysis shows that the re-introduction of grants improved participation of students from low-income families by 3.95 percentage points. This strongly suggests that abolishing grants will harm access. Similar studies from the US have drawn the same conclusions.

But under the chancellor’s new regime, students will be able to replace the loss in grants with further borrowing. Such a change is, again, an under-researched area, though there is a somewhat relevant 2001 study from the US. In this study, the entire loan portion of the student aid package (which consisted of loans, grants and campus jobs) for low-income students was replaced with grants at one north-eastern university after reforms in 1998.

The authors found no significant effect on overall participation as a result of the reforms. However, they did find some effect for minority students, suggesting different groups of students may see grants and loans very differently and may not have the response the chancellor is hoping for. It’s also worth noting this is a study from a single institution with students facing very different financial conditions than those here in the UK.

Osborne’s red box had some surprise for universities.Andy Rain/EPA

Osborne’s move could have worrying implications for equity and efficiency. While poor students may not face any increase in liquidity constraints – since they will have more cash in hand than previously – they will now graduate with more debt than those from better-off backgrounds. And debt-averse students – who are more likely to be found among the poorest groups – may be put off from applying altogether. As well as being inequitable, this could also be inefficient. The expansion of higher education over the past 30 years has helped productivity, and we need to ensure that talented students from all backgrounds participate.

Linking fees with inflation will cost the state

The other major announcement affecting higher education was that some institutions will now be able to increase their tuition fees according to inflation. This will come as a welcome announcement for universities, many of who have been calling for this for years. After all, the 2012 increase in fee caps to £9,000 was meant to give universities more control over their resources, but the government still maintains full control over the amount of fees they can charge through the cap.

But the announcement came with strings – only those institutions that do well in the recently proposed Teaching Excellence Framework, which will monitor and rank universities for great teaching, will be allowed to apply inflationary increases to their fees from 2017. While the £9,000 fee cap has been allowed to erode with inflation since 2012, it is worth noting that inflation is rather low at the moment, suggesting that the new policy will not have a huge impact on university finances.

More importantly, the government can’t yet afford to allow universities to make large increases to fees. Again, this is because of the high cost to the state of providing loans to students who may not pay them back. Any fee increase would come at a cost to the government.

But there are ways round this. The government also intends to: “review the discount rate applied to student loans and other transactions to bring it into line with the government’s long-term cost of borrowing”. The discount rate is a way of accounting for the fact that money paid in the future is less valuable to the government than money paid now; £1 today is worth more than £1 in the future. Student loan repayments come in slowly, over decades, so the government has to decide how much to value – or discount – these future payments.

If the government decide to reduce the discount rate, this means valuing future loan repayments more highly; hence future student loan repayments will automatically be worth more to the government than they were previously. So the estimated loan subsidy (and the amount of student loans that will not be repaid, also known as the “RAB charge”) will be reduced without any actual increase in repayments.

The government can also make loan repayment terms more punitive for students. Osborne also announced that the government is going to consult on freezing the repayment threshold for how much graduates have to be earning before they start paying back – currently set at £21,000. Such a move could largely balance out the cost of allowing fees to rise with inflation, since, as earnings go up, more graduates would find themselves over the threshold for repayment. This may be the start of a move toward even more punishing loan repayment terms as the government attempts to further reduce taxpayer expenditure on higher education and move towards a market-based, consumer-led sector.

Gill Wyness is also a research associate at Centre for Economic Performance at the London School of Economics. She has received funding for her research from a range of government departments, research councils, charitable trusts and other organisations, including the Economic and Social Research Council and the Education Endowment Foundation. All of her research is independent and the views expressed in this article are entirely her own.