Higher education funding reforms in England: the distributional effects and the shifting balance of costs



of future graduates poses more severe challenges, in particular because the
distribution of earnings of future graduates is likely to itself be affected by the
reforms. This is for a number of reasons. First, the reforms may affect the decision to
participate in HE, which may alter the composition of students/graduates and thus
earnings. Second, the reforms may affect choices at university, such as courses studied
and the length of time spent at university, both of which may affect lifetime earnings.
Finally, the reforms may have general equilibrium effects, for example through
affecting the supply of graduates, which may alter the relative wages of future
graduates.

With this in mind, our analysis of the effects of HE funding policies on incomes do
not represent forecasts or predictions of what we think the effects will be. Rather, they
are an estimate of what the effects would be given our simulations of the distribution
of lifetime earnings of graduates. They thus serve to highlight the varying
distributional impacts of different HE funding policies.

ii. The effects of different HE funding systems on graduates

Before we are in a position to make this sort of assessment for the new funding
system, we need to consider how much students are likely to borrow under the new
system. Although in practice there is likely to be less than 100% take-up of loans, in
fact it makes economic sense for all students to borrow the maximum fee and
maintenance loans available to them. This statement holds regardless of what other
sources of income are available, and is due to the large subsidy inherent in the zero
real interest rate, and the possibility of debt write-off. For this reason we base our
simulations on the full take-up of loans.

This implies that students taking courses that charge the maximum fee of £3,000 per
year will graduate with between £18,340 and £21,560 of debt for a 3 year course
(£9,000 of this for fees, and the remainder for maintenance), varying by parental
income due to slight variations in maintenance loan entitlements. This compares with
£12,350 maximum subsidised loans - all for maintenance - under the system that has

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