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

of loans remains income-contingent, with debt write-off after 25 years, but the
interest rate subsidy is effectively eliminated by the charging of interest of 2.5%
pa above inflation on the debt.

• Variant 2: “NZ” system: under this variant, similar to the one currently in
place in New Zealand, the repayment of loans also remains income-contingent,
with debt write-off after 25 years, and the interest rate subsidy is eliminated by the
charging of interest of 2.5% pa above inflation on the debt. However when
earnings are low, the income-contingent repayment amount may be too low to
cover the interest element of the loan. In this case, the government would pay on
behalf of the borrower the additional interest due, meaning that the outstanding
balance on the loan would be prevented from spiralling during periods of low
earnings.

Our calculations suggest that the removal of the interest subsidy (i.e. a switch from
the new system to variant 1) would amount to the equivalent of the removal of an
average up-front grant of around £2,465 for each female graduate and £2,880 for each
male graduate (whilst the additional cost to the graduate of the “NZ system” relative
to the new system would be around £1,940 and £2,280 respectively).

However, as can be seen from Table , these savings for the exchequer, and costs to the
graduate would be highest for men in the 2^nd to 4^th deciles of the male lifetime
earnings distribution, and for women at the 6^th and 7th, deciles of the female earnings
distribution. The very lowest female earners would lose relatively little from the
removal of the interest subsidy, since many are protected by the provision for debt
write-off after 25 years.

Table . Average additional costs to graduates of removing interest subsidies,

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