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Creative arts & graduate earnings

I have a new piece at Wonkhe on last week’s Longitudinal Earnings Outcomes data and the creative arts.
It develops what has been said in my recent talks to Curating at Goldsmiths and to ILAS at Keele.

 

Student loans & the creative arts- video

The video of a recent talk to the MA Curating at Goldsmiths is now online. It covers student loan debt from the angle of the creative arts and finished with a discussion of Longitudinal Earnings Outcomes data. The latter was finally published yesterday and I plan to write something on the creative arts data today.

Video: The New Settlement in HE

Keele University has made available the video of my talk from the end of April.

Thanks to ILAS for hosting me!

For those of you who’ve viewed the talk I gave in Cambridge in March, this is an expanded version.

 

 

The cost of writing off tuition fee loans

The Green Party manifesto pledges to write off all outstanding student loan debt.  It estimates that this would mean foregoing £14billion in loan repaments over the course of the next parliament.

Unfortunately, serious consideration of this proposal has to sidestep the Greens’ own analysis, which is amateurish.

Firstly, the OBR figures cited by the Greens are for the whole of the UK, whereas HE is devolved issue and the UK government only has oversight of the English system. To measure the short-term cashflow impact on the national finances of abolishing English student loan debt (also includes tuition fee loans made to EU nationals studying at English universities) you need to subtract roughly £0.3bn per year to exclude the repayments being made by students from the rest of the UK. This brings the short-term cashflow figure down to about £13bn.

Secondly, you have to ignore the fact that they are using a 2014 figure for the estimated impairment on student loans: the estimated difference between the value of loans made today and the value of associated repayments received over the next three and a bit decades (discounted). I recently explained why this much-cited 45% figure is out-of-date and misleading.

Thirdly, you need to realise that the Greens are wrong: you can put a value on the long-run cost of the write-off in terms of all future repayments foregone and indeed it’s done every year in the relevant departmental accounts. In the BIS accounts for financial year 2015/16, the face value of the English loan book was £76billion (the total of all outstanding balances added together at 31 March 2016). But the estimated value of future repayments associated with those loans is the fair or carrying value: £57bn. This isn’t exactly like the cashflow figure cited in the first paragraph since it is discounted figure giving a net present value, but it does tell you what the government thinks the loans are worth as a financial asset.

In fact, the cashflow approach is a little misleading. National accounting conventions would translate these lost future repayments into an impact on capital expenditure today. That figure would be closer to the face value (£76bn) than the fair value (£57bn) of the asset.

I’ll give a simplified version of what happens.

In financial year 2015/16, £11.46bn of new loans were issued (face value). These were expected to generate the equivalent of £8.826bn in repayments (fair value) before the accounts are closed. The government is thereby anticipating that the loans are impaired: the generate less than was lent. But as financial transactions neither the outlay nor the repayments affect national income or expenditure until accounts are closed (when the capital expenditure figure is recorded).

If it had closed those 2015/16 accounts immediately and written it all off, it would have lost £11.46bn, not £8.826bn (what it thinks the asset is worth) – ie it would simply have spent £11.46bn.

Now with loan accounts that have been open awhile this gets more complicated because there are repayments and interest etc. But the basic point is that the government’s “loss on loans” is the difference between original outlay and repayments received and with the latest loans it doesn’t expect to determine that figure until it closes accounts. The loss then scores in capital expenditure when that closure occurs (in the unfortunate event of death or disability or when the accounts are closed in accordance with the policy write-off, thirty years after repayments first fall due).  What’s important is that a write-off today brings forward that anticipated future loss and throws in whatever extra loss is implicated.

We can use those general points to address an issue raised by the Institute for Fiscal Studies in its Observation on Labour’s leaked draft manifesto. Writing about the plan to abolish tuition fees for current and starting students, IFS address the cohorts of students who have started since 2012 and faced higher fees but who will have finished before September.

There might be concerns about the equity of this; students who paid £9,000 fees would be doubly hit by large student debts, and the tighter public finances resulting from the subsequent introduction of free tuition fees. One option would be to compensate these students by clearing or reducing their tuition fee debts. This would be extremely costly, however, as the outstanding stock of loans for these graduates is around £30 billion.

IFS are correct. At the end of 2015/16, the face value of post-2012 loans was around £31billion. Given that tuition fee loans make up two-thirds of that debt, a rough calculation would suggest that clearing that tuition fee loan debt would be in the region of a £20bn cost to capital expenditure.*

Adding in another £8bn or so to clear the tuition fee loans made in 2016/17 and another £2bn (to adjust for the difference between financial years and academic years – an extra term of tuition fee loans in April 2016) would leave a retrospective tuition fee debt abolition pledge costing something in the region of £30bn. This would be a one-off hit to capital expenditure, equivalent to three years of Labour’s pledge to pay £11bn each year to abolish tuition fees and restore maintenance grants, though the latter represents an increase to current expenditure.

As a concluding aside, Labour’s manifesto costing document is concerned with a neutral impact on the current balance – how income balances current expenditure. Note that Labour’s plan to write off tuition fee loans made in academic year 2017/18 makes a commitment against capital expenditure similar to that described above, whereas the plan to restore institutional teaching grant (to support the abolition of tuition fees from 2018/19) makes a commitment against current expenditure.

*In fact, it’s more complicated, because lowering outstanding balances will also lower the repayments associated with the remaining debts. The effects of this additional impairment will be felt at different times – annually when any  interest costs to government are calculated (for pre-2012 loans) and then when accounts are closed (owing to death or disability or 30 years after repayments first fall due).

 

 

 

Conservative Manifesto

I’ve only had a chance for a quick look at today’s manifesto. While people will most likely be concerned about the announcements about keeping students in the net migration figures and the commitments both to drive that figure down below 100 000 pa and to make visa conditions (study and post-study) tougher, I think it’s worth flagging up the unexpected.

The Conservatives are committing to a review of tertiary education funding. From pages 52-53 of the document:

con manifesto

con manifesto 1

Institutes of Technology were announced in January’s Green Paper on Industrial Strategy – but with a relatively limited startup capital budget of £170million. That led to expectations that what was planned was the rebadging of existing institutions. £170m is only equivalent to the annual operating budget of the average university, so that’s going to get stretched if we’re going to have one ‘in every major city’.

The Green Paper also indicated that Institutes would concentrate on sub-degree provision (only up to level 5) – so this announcement is a departure from what was previously planned. There weren’t any references before to ‘links with leading universities’ nor to chartered status (a privilege only accorded to a minority of current English universities).

If you’re prone to reading the runes – then the stress should lie on links with leading universities and I would suggest we have here the outlines of a significant attempt at supply-side reform – one pitched at challenging post-92 universities where provision is mainly ‘classroom’ subjects in the arts, humanities and social sciences.

As for the review of funding, this should not hearten anyone – it’s likely to use Longitudinal Earnings Outcomes data to review whether certain courses provide value for students and public money. That is, should the maximum tuition fee for a course if its graduates see such little benefit (in the form of higher earnings)? This is the policy move I have outlined in recent talks in recent talks.

Otherwise, today’s manifesto appears consistent with what I outlined in three posts from October in relation to Theresa May’s likely approach to English HE.

 

 

 

The cost of abolishing tuition fees

Labour will enter the general election committed to abolishing tuition fees for undergraduate study (for English-domiciled and EU students studying in England).

London Economics and the Institute for Fiscal Studies have provided independent costings for the policy. Both take different approaches and have different modelling parameters.

London Economics have modelled the long-run economic cost of the change to be an additional £7.5billion per cohort of students (including FT and PT).   IFS reach an the same long-run cost figure per cohort but excluding part-time students (see Note 2 of their Observation). Additionally, IFS have outlined a £12bn increase to the deficit and show the graduate contribution (repayments in real terms) reducing to an average of £17,300 (or £13,500 when some maintenance grants are reintroduced).

These models are both extremely useful for considering the policy implications of Labour’s proposal. I would like to suggest a different tack by looking at current loan outlays and fee receipts.

The Student Loan Company issued tuition fee loans to 93% of eligible English-domiclied students in 2015/16. It made such loans to 964 000 individuals and these amounted to £7.685bn. Of the last, c. £340m was loaned to English-domiciled students going to study in the Rest of the UK. Another £345m went to EU students at English HEIs. The average tuition fee loan granted to a full-time student at an English HEI was £8,020 (for the year).

Provisional figures for 2016/17 – released in November – show an initial tuition fee outlay of £8.65bn for full-time undergraduates.  This may well reduce as the figures do not include any tuition fee waivers that an HEI may be applying nor do they reflect withdrawals in-year prior to term 3 (which would see payments reduce). At this stage, the average tuition fee loan made to an English-domiciled student was £8,440.

If we cross-reference this SLC data with undergraduate fee income received by institutions we see similar figures. The HESA statistical return for 2015-16 showed that English HEIs received £7.9bn in undergraduate tuition fee income. Hefce’s last financial health report showed aggregate institutional projections for this same fee income (in red below).

New Picture

These sources of information would seem to give us an estimated tuition fee outlay for 2016/17 in the region of £8.5bn for FT undergraduate. Note that the HEFCE fee income data includes those students who pay their fees upfront without SLC loans (but excludes sums laid out for those English students who study in Wales, N Ireland and Scotland).

In contrast, IFS and London Economics reach their full-time cohort figures as follows (based on correspondence and conversations with the authors of both reports).

IFS: 365 700 students take out £29,600 in tuition fee loans (average course length of 3.25 years) => £10.8bn or £11bn.

London Economics: 388 855 students take out £8,781 in fee loans per year (average course length and some non-continuation equating to 3.13 course years) => £10.686bn.

I suggest that the cash cost of Labour’s policy might be significantly lower than the IFS and LE models suggest and that if Labour commits to pound for pound matching of institutional teaching grant with fee income, an overall cash envelope is likely to be based on historic income and outlay data. And, to underscore the basic fiscal point: institutional teaching grant counts as current expenditure and therefore affects the deficit and Labour’s own fiscal rule dealing with the current balance. (Student loan outlay does not score against expenditure but does contibute towards public debt thought the public sector net cash requirement).

One final point, the IFS note includes a distributional analysis – which graduates benefit most from tuition-fee free policy.  This is what will underlie criticisms of Labour’s proposal as ‘regressive’ or providing a subsidy to the future middle classes.

ifs distribution

That’s by no means the final word on the policy but it’s important to understand the main objection. In the next week or so, I hope to type up my recent paper on polytechnics which outlines what changes I would want from universities in return for the restoration of significant teaching grant – part-time, lifelong is the key (rather than the boarding school model of 3 years away from home at 18).

We’re not in 2014 anymore …

What’s the current estimated ‘loss’ to government on new student loans issued (to English-domiciled students and EU students studying at English HEIs)?

23 per cent according to the 2015/16 BIS departmental accounts (published last summer). £11.460billion new loans were issued and associated future repayments are expected to amount to £8.826bn over the next three decades or so. It’s those associated repayments, which you would lose by converting loans made to cover tuition fees into grants.

The Treasury has currently set a ‘target impairment’ (or target RAB) of 28% and, as maintenance grants disappear and are replaced with higher maintenance loans, that non-repayment rate is likely to close in on the target. London Economics have an independent estimate of 28.6% for new loans issued in 2016/17.

If the target is missed a particular set of budgeting conventions kick in for the Department for Education, which has taken over responsibility for student loans from BIS. These will require the department to make savings from elsewhere in order to cover any surplus resulting from overshooting the target.

We are a long way from 2014 when the expected ‘loss’ on new loans issued had hit 45% after the government had budgeted for 30%. How has this recovery happened?

Firstly, the repayment threshold for those who have started since 2012 has been frozen at £21,000pa until 2021 – instead of rising in line with average earnings from 2017. A lower repayment threshold means more people in repayment and higher repayments – so more income is generated for the government. This was a retrospective price hike for borrowers.

Secondly, last year the government changed the discount rate on student loan repayments leading it to value future payments more highly. The government now discounts by RPI plus 0.7% rather than RPI plus 2.2%. With RPI at a constant 3%, that would make a future payment of £1000 in five years’ time worth £833 today rather than £774.  In contrast to the threshold freeze, the projected cash stream didn’t change: instead how that stream is valued improved.

Note that the value of £8.826bn repayments will be revised down in the next accounts due to recent upwards movement in RPI. As the discount rate moves up with RPI, the future value of repayments comes down – putting extra pressure on the DfE budget today (earlier this calendar year, DfE made a supplementary resource claim for an additional £11bn to cover movements in ‘the macroeconomic determinants of the student loan book’).