Student loan reform, interest subsidies and costly technicalities: lessons from the UK experience

In this paper, we consider lessons for other countries about the design of student loans with income-contingent repayments (i.e. repayments calculated as x per cent of each borrower's subsequent income). Using a dataset of 20,000 simulated lifetime graduate earnings paths, we estimate the cost and distributional effects of reforms in England in 2012. Introducing a real interest rate produces significant savings, mostly from graduates in the middle and upper earnings deciles. But those gains are offset by an increase in the income threshold at which loan repayments start. We conclude with discussion of policy changes to offset the increased cost of student loans (roughly £4,400 per graduate) within the current austerity climate, namely significant reductions in the higher education block teaching grant and a cap on the number of students.