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Regulatory bodies and private providers

Times Higher Education has published an article by me on the regulation of HE’s ‘alternative providers’.

This caps the work I did with the Guardian earlier in the year by giving adding a policy dimension to those stories.

Observer article on loans

Here’s a new article for the Observer.

Please ignore the ‘standfirst’ summary added to the online version – there are viable alternatives but the political imaginery is circumscribed by loans.

A longer version can be found here.

And see here for more information on how the accounting for student loans was changed in April.

Mortgage-style student loans – the repayment threshold goes down !??!?

In November last year the government sold its remaining ‘mortgage-style’ student loans to Erudio. These loans were available to those starting HE between 1990 and 1998 as replacement for student grants. At the time, outstanding balances on those loans were roughly £900m.

Unlike student loans now being issued, these loans are fixed-period repayment loans meaning that outstanding balances must be repaid within 5 years once an earnings threshold is crossed.

The 1998 Education (Student Loans) Regulations specify that threshold as

’85% of the lender’s estimate of average monthly earnings of all full-time employees in Great Britain for the January when the level will apply based on figures published by the Office for National Statistics’

Each September a new threshold is announced and borrowers are able to apply for deferral. In September 2013, the threshold was £28 775, much higher than on other student loans and one reason Erudio paid much less than the face value of the outstanding balances.

BIS continues to calculate the repayment threshold each year. The figures applies to the loans bought by Erudio but also those sold in the 1990s and now owned by Thesis Servicing.

The 2014/15 threshold was announced at £26 727 and came into effect on 1 September.

That’s a drop of over £2000. Since wages are not falling that looks very odd.

A BIS spokesperson told me:

“The repayment threshold for mortgage style loans will be £26,727 from 1 September. The threshold is calculated annually by BIS using earnings data published by the Office for National Statistics (ONS). This is set out in legislation and outlined in borrowers’ loan credit agreements which are regulated by the Consumer Credit Act 1974. As a result, neither BIS nor any third party are able to alter these terms.

“The threshold has reduced as a consequence of the reduced earnings growth indicated by the ONS data.”

Now reduced earnings growth is not a decline in earnings (or negative earnings growth, if you must). So it’s still hard to see what has happened.

BIS kindly provided me with their calculations.

BIS aim at estimating the Annual Mean Earnings found in the Annual Survey of Hours and Earnings (ASHE). Unfortunately there are lags in the publication of data which means that when trying to estimate a figure for 2014/15, BIS only has the ASHE data from April 2013 to go on.

So BIS uses monthly data about average weekly earnings which is provided more regularly and with much less delay (also ONS data) to estimate the likely increase in mean annual earnings over the next 21 months (Jan 2015 is the target in this case). BIS focuses on the weekly earnings data for April each year to get a year-on change.

The culprit is clear: April 2013 average weekly earnings are anomalous because of a large amount of bonus payments (following the abolition of the 50% tax rate for higher earners). The figure jumps to £484 pw from £472 pw (Apr 2012) but has now settled back to around £478 at present. If you just use those data points, it looks as if there were large wage increases in 2012/13 but that we have then had declines in income; since BIS then projects that trend forward into 2015, the effect is magnified.

On that basis, BIS has looked at the average annual earnings in April 2013 – £32 370 – and has projected, on the basis of the change in weekly earnings, a decrease of 1.65% per year over the 21 months to January 2015 to give estimated average annual earnings of £31,444. This then generates the repayment threshold for 2014/15 of £26 727.

But this is unreasonable – the ONS data overall shows a small but steady increase over the relevant period – roughly 1.9% pa, which would give a Jan 2015 figure of £33 464 and a 2014/15 repayment threshold of £28 444. A threshold £1717 higher.

That is a significant difference. Moreover, you won’t find anyone who thinks the ONS data supports the official figure. BIS have used the same calculation as every year but not used common sense to correct for a clear anomaly.

I do not know how many people might be caught out here for the next year (before the threshold ‘corrects’), but I do know they will face having to pay back at least one fifth of their debt over 12 months before they can get a new deferral – that could be over £100 per month.

Obviously the sales have complicated matters, but nothing in the legislation or loan agreements specifies the particular calculation used by BIS.

You could argue that by sticking to the method they have always used they have in fact gone against the legislation.

BIS have ended up using the only ONS data point which would indicate a decline in earnings.  BIS are meant to be estimating the ASHE figure for 2015 but have reached something mechanically that no one believes to be reliable. Prima facie that looks unreasonable and ought to be open to challenge under consumer credit legislation.

BIS have promised to provide me with further comment on Monday.

Update

This blog was updated on Friday afternoon to reflect the fact that the BIS calculation is used for loans owned by Thesis Servicing as well as those bought recently by Erudio.

Second Update

An expanded version of this blog with updates from BIS and NUS appeared on the MoneySavingExpert website. It includes a discussion page.

Universities as buyers of graduate debt

In light of the coverage being given to the idea that universities could buy their own graduate debt, here is a reminder of the article I wrote for False Economy in December to accompany the publication of Rothschild transcription (available as a pdf on the site).

Here are some key extracts from the article:

One of the most interesting aspects of the Rothschild review is the detail provided on the rejected models, not least because of the centrality of the suggestion that universities could be encouraged to underwrite the risk of poor graduate repayments through debt issues or equity stakes in special purpose vehicles.

And:

What was most crucial though is managing the decades-long transition to steady-state. Rothschild makes clear, the private sector do not have that kind of risk appetite:

“However the [risk] allocation of the Utility structure involved the private sector taking short term risks (and rewards) on the performance of the portfolio, with Government retaining the longer term risks (and rewards).”

Meaning that the government would continue to cover the longer term risks even with a ‘subsidy and rebate mechanism’. Basically it needed engineering to distribute the annual income pool in such a way as to keep the private sector interested. With the government tied in as backstop, the Office for National Statistics determined that insufficient risk would be transferred to the private sector. The main aim of a sale was stymied.

‘Utility’ was therefore discarded and the government has fallen back on the idea of a ‘one-off’ sale of its existing stock of income contingent repayment loans: precisely what the White Paper said it would not be pursuing. Rothschild are clear: they would like the case to be reviewed and a way found for ‘universities (in the private sector) [to] take the long term economic risk’. Were this to be packaged up with exemptions from the maximum tuition fee, with some of that income deferred through the ‘Utility’ dividends, then some wealthier universities may well consider such an option (despite the transformations it would effect on academic relations).

Since the government seems to believe that it can move towards a sale of the ‘coalition loans’, this may be a model at the forefront of HE policy in the 2020s.

The £160m Sale of ‘Mortgage-Style’ Loans

The BIS Committee have got themselves into a bit of a tangle discussing the sale of mortgage-style loans in 2013 (§§58-65 of the report).

That sale saw the government receive £160m on an asset with a face value of £890m (what the outstanding balances say borrowers owe to the government).

So we know the price and we know the face value of the loans.

What we didn’t know was what the government thought those loans were actually worth (the fair or carrying value): how much income was going to come in and when.

Having those three distinctions in mind -price, fair value, face value – is essential for considering loan sales.

I was asked explicitly about the 2013 sale at the evidence hearing.  Read more…

“Logical flow-throughs” – is expansion funded by a sale? (redux)

andrewmcgettigan:

with added relevance today

Originally posted on Critical Education:

Plashing Vole has shared some correspondence with Wolverhampton MP, Paul Uppal, relating to higher education and student loans. Uppal is David Willetts’s parliamentary private secretary, which makes one particular paragraph extremely interesting.

Regarding the proposed programme of student loan sales, Uppal writes:

Current market conditions are favourable and BIS advisors have confirmed there is potential interest from a range of buyers in investing in the loan book. This has informed the estimates of potential proceeds of approximately £12 billion over a five year period. It has been calculated that the additional outline of loans for the expansion of students numbers over the forecast period will be more than financed by proceeds from pre-2012 loan sales. If the sale of the loan book does not go ahead or does not provide the expected receipts, The Treasury will need to consider the impact on public sector net debt. This will be a…

View original 223 more words

BIS Committee report into Student Loans published

The BIS Commitee has published its report into student loans. Two evidence sessions were held in December and January. I appeared at the first, David Willetts at the second.

Events may have overtaken the findings that do not simply echo the conclusions of the  National Audit Office in November.

At the weekend, Vince Cable announced that he will not authorise a sale of the student loan book. That means that the Committee’s concerns about getting value for money from the putative private sector loan purchasers are rendered academic for the time being. (I am grateful to the committee for the open discussion of the ‘synthetic hedge‘, a financial instrument devised specifically to overcome the interest clause on the income contingent repayment loans issued to those who commenced undergraduate study between 1998 and 2011.)

Cable told Liberal Democrat members:

“The government was considering the sale of student loans on the basis that it would reduce government debt. Recent evidence suggests this will no longer be the case. Given there is no longer any public benefit, Nick Clegg and I have agreed not to proceed with the sale.”

What implications might that decision have for higher education funding? The Committee’s report underscores just how confusing and inconsistent  ministers and the chancellor have been about any link between loan sale proceeds and the promised expansion of undergraduate places. Osborne’s Autumn Statement insisted that the first would pay for the second, though he retreated a few days later to a different claim: that the cash from purchasers would help the expansion through the early years.

In the January evidence session, Matthew Hilton, a civil servant in BIS, told the Committee:

 “It would be fair to say that the Treasury do intend to underwrite this policy. If there is a shock to their expected budgets that changes some of the planning that they have in hand, we would have to sit down and talk to them, as would any Department; but there is no logical flow through from a decision on the loan book to a decision on the expansion of HE budgets.”

Willetts sent a subsequent note insisting that “the announcement on removing the cap on student numbers is fully funded”.  But Willetts’s permanent private secretary told a constituent a few months later that were the sale to fail then these commitments would be reviewed. Apparently sources close to the Chancellor have been insisting that nothing has changed as the loan sale was earmarked to pay down public sector net debt: this shows a marked lack of understanding of the cash streams involved here.

As I said back in December, the Autumn Statement smacked of bad bunko gimmickry. The BIS Committee report stresses that the basics, such as the ability to value the loan book accurately, were not even in place back then.

§42 A common thread in our inquiry and that of the Committee of Public Accounts was the lack of a solid evidence base on the data underlying the student loan-book.

We should note that the Autumn Statement assumed that the equivalent of 65 per cent of loans issued would be repaid; we now have an official estimate of only 55%. On over £10billion of loans per year that’s a shortfall of £1bn. As things stand, we do not know what the immediate consequences for the expansion policy will be as a result of Cable’s stance. Cable spent yesterday afternoon/evening in an emergency meeting.

The department for Business, Innovation & Skills has not been able to provide a statement that would shed light on these matters, only that ‘There are no plans to conduct a sale during this parliament.’ I asked about further work on the sale and whether a tender might be published before the general election but have not yet had a reply.

The Committee offer the following summary:

§78 The Government appears to have committed itself to the sale of the income contingent loans before it has fully assessed the financial viability of such a move.

Quite.

Update

The OBR will amend its fiscal forecasts. New ones without the net loan sale proceeds will appear at the next Autumn Statement (December?).

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