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

Note that to calculate net present values of debt repayments and the value of taxpayer
subsidies, we assume a real discount rate of 2.2% per year (this follows the
government’s present convention for discounting, see DfES, 2007).²⁰

We also assume that no graduates avail of the option to take a five-year holiday from
loan repayments (announced in July 2007). Although it would be in the financial
interest of all graduates to take this option (assuming the zero real interest rate on
loans is maintained), it is difficult to predict when graduates would choose to take this
holiday, and just how extensive it will be when it comes into force. However, it should
be noted that we estimate that a graduate who takes it in the first five years of being
eligible for repayments stands to gain an additional £850 in subsidies from the
government, regardless of their position in the lifetime earnings distribution. Further
details are available from the authors on request.

a) Distributional effects of the new system

The first exercise we perform using our estimated graduate lifetime earnings profiles
is to assess the net present value of debt repayments that graduates will be expected to
make (i.e. net of any subsidies they gain from the zero real interest rate and debt
write-off), the number of years that graduates can be expected to repay their loans,
and the taxpayer subsidy (expressed as a proportion of the original loan) that they can
expect to receive under the new system. In all cases, we show how these outcomes
vary across the distribution of graduate lifetime earnings.

Figures 4a though 4c, and Table show the combined distributional effect of the
interest subsidy and the debt write-off provision. Each panel shows the whole
population of graduates, though this masks substantial heterogeneity across males and
females, which are also shown. For a given level of debt on graduation, lower
lifetime-earning graduates will eventually repay less of their debt, whilst higher
earners will repay more (Figure 4a and Table , column a). This is not a surprising

20 Note that our previous simulations in working versions of this paper, and others, used a 2.5%
discount rate. By using a that higher discount rate, we in general projected a greater cost to the taxpayer
in loan subsidies, and a lower cost to the individual than we do here; the length of time we simulated
that it would take graduates to repay their loans was also generally longer than with our current
earnings simulations.

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