SLTG0234
Written evidence submitted by Universities UK
Treasury Select Committee Call for Evidence: Student loans and taxation of graduates
Universities UK response
Introduction
Universities UK is the collective voice for 142 UK universities. Our mission is to harness the power of the UK’s universities and create the conditions for them to thrive.
Although conducted by the Westminster parliament, this inquiry has relevance across the UK, and we have included a summary of these considerations at Annexe A. Unless stated otherwise, our recommendations apply to the system in England only.
Executive summary
The UK’s higher education system has changed significantly in the past 30 years, with hugely increased participation, especially for disadvantaged groups. This has brought major benefits for graduates, our economy, and society, but also required upfront cost, which would not have been possible under a fully taxpayer-funded system.
Universities UK believes that the costs of higher education should be shared fairly between those that benefit from it. Graduates typically experience significant gains from their degrees, including higher lifetime earnings, so it is right that they contribute to its cost. The student loan system is a fair way to achieve this, given it ensures university tuition is not payable at the point of entry for those taking it up, and offers protections for graduates who are unable to work, or who are on lower incomes. We strongly support the fundamental architecture of the income-contingent loan system in England, which successive major reviews have found to be the fairest way of funding expanded participation in higher education.
Higher education delivers significant public value through driving economic growth, providing higher-level skills, and supporting public services, as well as wider benefits to society. Government investment is therefore essential. However, the balance has shifted too heavily towards graduates over the past three decades, even when accounting for government subsidies through estimated future loan write-offs.
Evidence commissioned by UUK suggests that the balance of funding has shifted from a system where most costs were covered by the state, to one where undergraduate students starting their degree in England today are expected to pay 77% of the costs of university teaching.[1] Over time, the state should assume a greater share of funding to sustain the economic and social contribution that higher education delivers.
We recognise that many graduates face financial pressure when repaying their loans. However, reforming the system would be costly for government, particularly given the current strain on public finances. Fairness cannot be judged in isolation: loan repayment systems consist of interconnected measures that must balance contributions over graduates’ lifetimes and ensure fairness between groups. In recent years, governments have repeatedly changed repayment terms without clear justification, creating the impression that decisions were driven by budget pressures. This should stop. We also strongly oppose funding changes to the student loan system by reducing direct support for university teaching or research, as this would limit student opportunities.
Principles and recommendations for the student loan system
UUK recognises that many of the issues examined in this inquiry are a matter between the government and individual students/graduates, and we do not take a detailed view on specific terms. However, universities have a strong interest in many of the broader issues raised. Our response focuses on four principles, on which any revisions to the student loan system should be based.
1) Opportunity: Higher education should be available to everyone who has the potential to succeed.
The repayment system for individual contributions should not act as a disincentive for people to participate in higher education, especially those from disadvantaged backgrounds.
Recommendations
- When making changes, the government should consider equity between cohorts of students and graduates, as well as within cohorts – including future generations of prospective students, as the loan repayment system must not act as a disincentive to participate in higher education.
- Over time, the government should increase its contribution to the cost of higher education, ensuring that future generations are also able to benefit from a well-funded higher education system at a similar level to previous generations, without taking on proportionally more of the cost.
2) Stability: The costs of study and the associated repayment arrangements, including how these may change, must be clear and predictable.
Prospective students and graduates should have clear information about the current and future costs of higher education, including how loan repayments work, and how these may change over time.
Recommendations
- The government should consider how well the student finance system is understood by students and graduates, and ensure that prospective students considering university receive clear, transparent guidance on the repayment terms and conditions, and how these may change.
- The government should ensure that the student loan repayment system accounts for the introduction of modular study funded via the Lifelong Learning Entitlement, including making a clear distinction between repayment rates for ‘traditional’ study towards a full qualification and modular study.
3) Transparency: Any changes to repayment terms must be fair and transparent.
Adjustments to student loan conditions should only be made if this is required to maintain a fair balance of cost between graduates and taxpayers. Alongside this, any changes should simplify and not add complexity.
Recommendations
- The government must commit to proactively alerting graduates to any changes affecting their repayment terms and conditions, and publish this information clearly for the public, students, and graduates to see.
- The government must commit to updating its annual publication of student finance statistics with greater narrative and contextual information, setting out clearly the total proportion of student loans it expects to be repaid and its own level of investment, how this has changed, and the assumptions on which this is based.
- Changes to the terms on which graduates agreed their student loans (such as repayment thresholds) should not be made for the purpose of addressing fiscal gaps elsewhere.
- Government policy decisions on the appropriate level of student loan repayments should not be driven by accounting treatment, but rather its own strategy.
4) Fairness: The system must safeguard people on lower incomes from any disproportionate repayments.
Higher education funding should be progressive, ensuring there is no penalty for people who find themselves unable to work, or who take career breaks to look after others, or who are on relatively lower incomes. These are often the same people who work in vital public sector jobs and contribute disproportionately to UK communities.
Background
Today’s higher education system and its value to graduates and society
In the early 1990s, around 15% of 17-30 year olds had attended university, while today, 50.9% of the population have participated in higher education by age 25 (in England). There has also been considerable progress in widening participation: the proportion of pupils receiving Free School Meals who go on to university in England has doubled from 14.2% in 2005/06, to 28.9% in 2023/24. Higher education is an important engine of social mobility, and we should be proud that all students with the potential to succeed can access higher education, regardless of their background or household income. The income contingent loan system has supported this by ensuring that students from all backgrounds can access maintenance funding, and do not need to pay tuition fees upfront.
The expansion of higher education has benefited individual graduates, and the UK’s economy and society as a whole. Over their lifetime, people with a university degree typically enjoy higher earnings, better health outcomes, and greater opportunities than those without. Official figures on graduate and non-graduate earnings show that by age 31, graduates earn a third more than those who could have gone to university but chose not to. This is particularly important for those from disadvantaged backgrounds: for graduates who had been in receipt of Free School Meals, average graduate earnings growth is 75%, compared to 26% for non-graduates who could have attended HE but chose not to. There are also a number of non-financial benefits for individuals who have participated in higher education, including greater life satisfaction.
Higher education also benefits our economy and society: a highly educated population drives economic growth, strengthens our public services, and enriches civic life. Higher education teaching and learning which took place in 2021-22 will provide an economic benefit of £95 billion across the UK, through increased earnings and net of government spending on higher education. Employers benefit from higher-level skills, with graduates representing a significantly greater share of the workforce in high-performing and fast-growing sectors, compared with the rest of the economy. Graduates will continue to be a vital part of the UK’s future prosperity. The government has said that by 2030, 82% of employment in priority occupations in growth sectors will require a higher education qualification.
Universities also support our public services. More than 191,000 nurses, 188,000 teachers, and 84,000 medical specialists are expected to graduate from UK universities between 2021 and 2026. Society also benefits from higher education more broadly, with graduates less likely to commit crime, and having higher levels of civic engagement, democratic participation, and volunteering.
However, expanding our higher education system to deliver these benefits has come with an upfront cost, which would have been impossible to achieve if higher education had remained solely funded by the taxpayer. Since the 1990s, governments have funded higher education through an income-contingent loan repayment system, with both individual students/graduates and the state contributing to the costs of higher education (teaching and maintenance).
The income contingent loan system
Referring to student finance payments as ‘loans’ disguises significant features of these products. Although the specific terms of an individual’s loan are determined by their repayment plan (see Annexe B), repayments are only due when income is above a certain threshold. Unlike commercial loans, such as a mortgage or bank loan, individuals only repay when earning enough, building in a significant safety net. Outstanding debt is also written off after a certain length of time (for Plan 2 borrowers, currently 30 years after the April you were first due to repay). This means that for some, especially those who are not higher earners, the ‘loan’ in fact works more like a ‘tax’ or ‘higher education contribution’. A graduate’s monthly repayment level, and the length of time they will need to repay their loan, are far more relevant to an individual’s personal finances than their total loan balance – as the government will effectively subsidise any proportion that is not repaid within the relevant term. This subsidy is an intended feature of the system, representing government investment, rather than a flaw. The expected proportion of government subsidy depends on the estimated RAB (‘Resource Accounting and Budget’) charge, i.e. the proportion of the loan outlay that the Exchequer expects to write off. The RAB charge forecast is determined by several factors, including (but not limited to):
- Loan repayment terms (e.g. Plan 2, Plan 5), including the earnings threshold for repayment, loan repayment period, and interest rates; and
- A range of economic factors, including graduates’ expected earnings, inflation, or the government cost of borrowing associated with student loan outlay, which government account for by applying official ‘discount rates’.
As with any predictions about the long-term future, estimates here are inherently uncertain. The expected government subsidy can vary significantly as forecasts change, even for the same cohort of students. Both repayment terms and discount rates have changed significantly in recent years; the discount rate used to estimate the RAB charge has declined from RPI plus 2.2% as of April 2012 to RPI minus 0.55% as of April 2026.[2] This can have major implications on the proportion of loans that graduates are expected to repay.
While the government will always need to account annually for the long-term cost of student loan repayments, UUK agrees with the IFS that government policy decisions on the appropriate level of student loan repayments should not be driven by accounting treatment, but rather its own strategy.
Interest rates and the balance of cost
UUK does not have a detailed view on precise interest rates for student loans. However, we consider that a certain level of interest seems reasonable, to ensure that repayments account for inflation. For the majority of Plan 2 borrowers that are not expected to repay their student loans in full, the measure of interest used (RPI or CPI) would not make a difference to lifetime repayments. However, we recognise it is disheartening for graduates to see their outstanding loan balance continue to grow, even when paying significant sums of money each month, and may act as a disincentive for prospective students looking to attend university
However, reform is required to rebalance the current burden of cost. Reforms to higher education funding over the past 30 years have seen the balance between individual (i.e. graduate) and public (i.e. taxpayer) contributions shift significantly towards the individual. In 1998/99, the year upfront tuition fees were first introduced, 64% of teaching funding came from direct government [3] a figure that has substantially reduced.
Ensuring that individuals take on a greater cost of their higher education has been a stated policy aim of higher education funding reform, including those in 2012 that saw a trebling of tuition fees. However, over time the burden on the individual has increased significantly. In 2012, the government significantly reduced its direct grant funding, and tripled tuition fees to be repaid by the new Plan 2 loan system. The graph below illustrates[4]:
- The relative Exchequer/graduate contribution for the 2012/13 cohort of students, based on discount rates and repayment terms in 2012/13 i.e. government’s expectation of the system at its inception (Scenario A);
- The relative Exchequer/graduate contribution for the 2012/13 cohort of students under today’s discount rate, if loan repayment terms had not changed (Scenario B);
- The relative Exchequer/graduate contribution for the 2012/13 cohort of students under today’s discount rate and actual loan repayment terms that reflect the various changes since 2012/13 (Scenario C); and
- The relative Exchequer/graduate contribution for students starting their degree in 2025/26 (Scenario D).
This demonstrates how the expected graduate contribution has changed over time, and the corresponding Exchequer contribution declined. Based on Plan 2 loan repayment terms and the discount rate in 2012/13, the government would have expected to contribute 54% of the cost of teaching a cohort of full-time, English domiciled undergraduate students starting their first degree in England in that year, with the graduate paying 46%.[5] However, due to changes to both repayment terms (which are a matter of government policy) and the HMT discount rate (which are outside government’s direct control) over time, the same cohort of graduates (i.e. those who started university in 2012/13) are now expected to contribute 75% of the total cost. For full-time, English-domiciled undergraduate students starting their first degree in England in 2025/26 (with a Plan 5 student loan), the government expects to invest only 23% of the costs. [6]
UUK recognises that macroeconomic conditions are challenging, and the government faces a number of demands on public finances. We also welcome the government’s recent decision to commit to annual inflationary tuition fee uplifts, ensuring that tuition fees do not lose their value as costs rise. However, we believe that over time, the government should increase its contribution to the cost of higher education, ensuring that future generations are also able to benefit from a well-funded higher education system at a similar level to previous generations, without taking on proportionally more of the cost. This is an investment in higher education and its ability to transform our economy and society.
Any changes to the current loan repayment system are likely to entail a significant cost to the government and the taxpayer, and will require difficult trade-offs. We would not support changes to the student loan system that result in reduced government funding for universities from grants for teaching or research, which would reduce opportunities for current and future cohorts of students.
Terms of loans and the government's ability to change them
The student loan system is complex, and has become increasingly so over time, with the introduction of multiple repayment plans, changes to terms and conditions, and divergence across the UK. We recognise that student repayments sit within a challenging financial landscape for many graduates, many of whom will be affected by other pressures such as a sluggish labour market, high housing costs (including difficulties saving for a house deposit), and childcare costs.
Evidence suggests that the student loan system is poorly understood, even among graduates, with research indicating that this group had even higher levels of misunderstandings about the system than the general public. We understand concerns around debt can cause anxiety for students. However, it is important to note that for many the loan does not act like a true ‘debt’, due to its income contingent nature, and the fact it is written off after a period. The government should consider how well the current system is understood by students and graduates, and whether changes to how the system is described could improve understanding.
Going forward, the costs of study and associated repayment arrangements, including how these may change, must be clear and predictable for prospective students and graduates. In future, the government should ensure that prospective students considering university receive clear, transparent guidance on the repayment terms and conditions, and how these may change.
Changes must be fair and transparent: while adjustments to student loan conditions may be necessary, this should only be done if this is required to maintain a fair balance of costs between graduates and taxpayers. Crucially, changes to the terms on which graduates agreed their student loans (such as repayment thresholds) should not be made for the purpose of addressing fiscal gaps elsewhere. Graduates are already likely to be negatively affected by the prevailing economic conditions that result in fiscal gaps (e.g. a difficult labour market), and subsequent changes to their loan repayments will therefore function as a double penalty for many.
Recent changes to the student loan repayment system have been relatively opaque: the decision to freeze repayment thresholds at the 2025 Autmn Budget was announced in the accompanying OBR documents, for instance, rather than the main Budget documents. The government should commit to proactively alerting graduates to any changes affecting their repayment terms and conditions, and publish this information clearly for the public, students, and graduates to see.
We recognise the repayment system is complex and there is inherent uncertainty in predicting future repayments, but the range of different estimates (e.g. from the OECD, IFS and DfE) around the current system and costs of potential reform only complicates the debate. The government should commit to updating its annual publication of student finance statistics with greater narrative and contextual information, setting out in an accessible manner the total proportion of student loans it expects to be repaid and its own level of investment, how this has changed, and the assumptions on which this is based.
When making changes to the terms and conditions of student loans, the government should also consider equity between cohorts of students and graduates, as well as within cohorts – including future generations of prospective students, as the loan repayment system must not act as a disincentive to participate in higher education.
Finally, any future changes to student loan repayments should maintain stability, and seek to simplify the system, rather than add additional complexity. To this end, the government should make any changes needed to account for the introduction of modular study funded via the Lifelong Learning Entitlement. This is a change to the English student finance system for courses starting from January 2027 onwards, enabling learners to receive student finance for studying single modules, rather than a standalone qualification, for the first time. The government should ensure the system adequately accounts for this change, including making a clear distinction between repayment rates for ‘traditional’ study towards a full qualification and modular study, and considering the most appropriate repayment schedule for those on modular study.
Fairness
In making changes to the student loan system, the government must pay attention to equity between cohorts of students and graduates, as well as within cohorts. In recent years, the availability of a government-backed, income contingent loan system has facilitated widening participation in higher education, enabling students from all backgrounds to progress. This must extend to future generations, so that all who have the potential to succeed in higher education can do so: the student loan system must not act as a disincentive to participating in higher education.
The government should also retain protective features of the current system, and continue to safeguard people on lower incomes from disproportionate repayments. It is important that graduates who find themselves unable to work for any reason, or who do not go on to achieve higher earnings, are not subject to financial penalty.