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‘Inflation forecast mistakes’ mean student loan support worth 10% less this year

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09/11/2022
The cost-of-living crisis and prolonged period of high inflation means university students have actually seen a real terms cut to maintenance support since 2020, according to a research institute.

Around half of students’ incomes is from maintenance loans with the amount varying depending on where you live in term time, as well as your household earnings, ie what parents earn.

Currently the maximum maintenance loan entitlement is just over £8,000, with this figure increasing each year in line with forecasts for the Retail Prices Index measure of inflation (excluding mortgage interest).

According to Kate Ogden, research economist at the Institute for Fiscal Studies (IFS), this should mean that as prices rise, loan entitlements also rise so the real value of support for students is maintained.

Ogden revealed that between 2017 and 2020, loan entitlements increased by around 3% each year and CPI (the more widely used Consumer Prices Index measure of inflation) was actually lower than RPI “so maintenance support was increasing more quickly than consumer prices”.

Last year, maintenance loans increased by 3.1% and this year by 2.1%.

“If government sticks with usual policy, then maintenance support in the next academic year will rise by 1.8%.”

Entitlements not kept up with consumer inflation

Ogden added that loan entitlement rises haven’t kept up with inflation in the last few years with CPI last year standing at 6% while it’s expected to be just over 10% this year.

“So those rises in support are actually real terms cuts of 3% last year, 7% this year and possibly another 2% next year”, Ogden said, based on the Bank of England’s inflation predictions.

“Inflation coming in higher than expected means that maintenance support has been cut significantly in real terms since 2020.

“Those past mistakes in inflation forecasts are never corrected. This means support is worth 10% less this year than it was two years ago,” she revealed.

In monetary terms, Ogden said this equates to a cut of around £960 a year for someone living away from home, outside of London.

Minimum wage analysis and parental earnings freeze comparison

Meanwhile, the IFS also looked at what average earnings a typical student (studying 37 hours over 30 weeks) would earn on minimum wage if they were no longer studying.

Ogden revealed the support and minimum wage ‘tracked’ until 2020 but since then, a ‘gap’ has emerged whereby students giving up their courses could earn £1,100 more working on minimum wage compared to what they will get from their maintenance loan.

Further, the IFS looked at another “less obvious” way in which maintenance loans are becoming less generous, and that’s due to the freeze on the lower parental earnings threshold.

In order to get the maximum support of £8,000, the parental earnings threshold is £25,000 and this has been frozen since 2008.

Ogden explained that if the threshold had increased with average earnings, it would stand at £35,000 today.

“This means only around half as many students are entitled to the maximum support now as would be if that threshold had not been frozen for the last 14 years,” she said.

Where can students get further support?

Ogden said the system assumes students will receive financial help from parents, but this cohort are also dealing with the effects of the cost-of-living crisis.

Most aren’t eligible for benefits, apart from if they’re disabled or have dependents, but they will be entitled to the £400 energy rebate, but this is per household, not per student.

She said it is likely students may look to get a job or increase their hours around studying, but with many typically heading to the retail and hospitality industries, but unemployment is expected to rise over the next few years “which might make it harder to find those extra hours”, Ogden warned.

Alternatively, universities may offer their own hardship funds so students are encouraged to find out the details from their individual university.

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