There have been radical changes to the provision of higher education in England as tuition fees trebled to £9,000 from 2012 onwards and maintenance grants were also  scrapped. As such, 96% of upfront government support for university students comes in the form of loans.

The combination of high fees and large maintenance loans mean English graduates have the highest student debts in the developed world.

The Institute for Fiscal Studies (IFS) has published a report on higher education funding, looking at the long-term costs faced by graduates.

It said that the 2015 policy that replaced maintenance grants with loans leaves students from the poorest backgrounds accruing debts of £57,000 (including interest) from a three-year degree.

While their ‘cash in pockets’ has been protected, the IFS said the funding is “almost entirely in loans rather than free cash” so students now graduate with average debts of £50,000. Three-quarters will never pay off their student loans, even if they are contributing in their fifties, said the report.

As repayments are proportionate to income (9% on anything above £21,000), there is “significant variation” in graduate contributions, with the highest earners repaying considerably more than the lowest.

However, changes since 2012 have increased the repayments of almost all graduates, increasing the burden of student loans for low and middle earners – driven largely by the freezing of the £21,000 repayment threshold until at least April 2021.

Further, the IFS said the use of RPI + 3% during study – currently 4.6%, but rising to 6.1% in September – results in students accruing £5,800 in interest on average during study. For high earners, the use of RPI + 0–3% rather than CPI + 0% increases lifetime repayments by almost £40,000 in today’s money. This is due to lengthening the period of repayment rather than increased payments in any given year.

It also said there is a risk that better-off parents will pay fees up front, especially if they think their offspring will be high earners. This would increase the cost to government in the long run, as high-earning graduates repay more than the value of their loans.

‘Loans longer than mortgages but repayment terms fairer’

Jake Butler, student money expert at Save the Student, said: “I would always stress that the impact of the increasing student debt is currently more of a psychological than monetary one for the majority of students. The figures may seem frightening, but students, including those from lower-income backgrounds, are protected by the way loan repayments currently work.

“And while many are quoting that these loans are longer than mortgages, the repayment terms are much more fair. Regardless of the interest, graduates will simply pay 9% of anything they earn over £21,000 per year and their debt is completely wiped 30 years after graduating, no matter how much they’ve paid back.

“It’s now quite widely known that the only people who will end up paying off their whole loan are the very high earning graduates (those that start on a salary of around £31,000+ according to our student loan calculator). They’re likely to be the only ones affected by the sharp rise in the interest rates.

“To add to this, it’s important that students remember that the interest on their loan is a complex issue that is affected by many factors. For instance, if inflation were to fall at any time during their repayments so would the interest on their loan.”

See YourMoney.com’s Should you pay back your children’s student loans? for further details.