Student loan terms to be made clearer in England
A study of the UK student loan model finds low application barriers, wide coverage, low repayment pressure for low earners, and recovery expectations below half.
What the loan system is designed to do
A study of the UK student loan model describes how the country introduced student loans to address a shortfall in higher education funding as participation widened. Under that system, university students can apply for a tuition fee loan and a living cost loan to attend university.
The same study characterises the overall model as a distinctive form of inclusive finance: pressure on borrowers is low, participation is high, and it also performs a secondary function of redistributing income.
How easy is it to get a loan, and how hard is it to repay?
The study reports high coverage. It describes the loan threshold as low and finds that nearly nine in ten university students applied for and obtained both tuition fee and living cost loans.
On the repayment side, it describes low pressure for graduates. Borrowers who earn little repay less, or may not repay at all, which the study says reduces their worry about the loan and raises the take-up rate.
The study also sets out two features that sit behind the low administrative burden: loans are issued without a credit check, and repayment is collected by the tax authority through payroll deduction. It notes this keeps management costs low.
Two further characteristics are recorded. The interest rate on the student loan is not subsidised and is higher than on a residential mortgage. The study also records a high loss rate, with the expected recovery rate on student loans below half.
What effects does the study attribute to the system?
The study links the design to three outcomes.
- It promotes educational equity: because students can obtain tuition fee and living cost loans, they can attend university regardless of family income.
- It supports high loan participation: because repayment pressure after graduation is light and low earners repay little or nothing, borrowers are less anxious and more likely to take a loan.
- It helps reduce income inequality: the study compares the interest rate and repayment design to an income tax on high-earning graduates, with low-earning graduates paying nothing, which it says indirectly adjusts income.
FAQ
Can students in the UK get help with both tuition and living costs? Yes. According to the study of the UK student loan model, university students can apply for a tuition fee loan and a living cost loan.
Do borrowers need a credit check? No. The study states that student loans are issued without a credit check, and that repayment is handled by the tax authority deducting from income.
What happens if a graduate earns little? The study says borrowers with low income repay less or may not repay at all.
Is the student loan interest rate subsidised? No. The study states that the interest rate on student loans is not subsidised and is higher than the rate on housing mortgages.