Skip to content

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 I recently explained why this much-cited 45% figure is out-of-date and misleading.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’).

 

 

HERB returns to parliament for final act

Today, the Higher Education & Research Bill returns to the House of Commons for its final reading as MPs consider the amendments made by the Lords and a new set of ‘compromise’ amendments designed to have HERB become law by end of play on Thursday (when parliament will be suspended prior to its dissolution before Wed 3 May).

The amendments are fragmentary, technical and basically hard to read. GuildHE and Universities UK have again published a letter setting out their support and providing a gloss on the changes.

The headlines are:

  • The government is seeking to overturn the Lords amendment breaking the link between TEF outcomes and differential fees. This amendment will be replaced with one committing to defer any such link until 2020/21, after an independent review of TEF in 2018. The review will be led by an individual who ‘commands the confidence’ of HEIs.
  • This doesn’t mean that tuition fees will be frozen until 2020/21 but that there is no mechanism to set different maximums for different institutions. Future changes to the maximum tuition fee will be agreed by both Houses of parliament.
  • It does mean that the only incentive for institutions to participate in the TEF (which is voluntary) over the next few years is to influence the development of the policy.
  • The government is seeking to remove the Lord’s upfront clause which would have defined a university in law. Instead the government has pledged to consult with the sector about new guidance on the award of university title. This guidance will be given to the Office for Students (which will be created by HERB). It’s worth remembering that the White Paper pledged to remove the current specifications on minimum size meaning that we could see universities in future that do not even meet the size requirements for sixth form colleges (200 students).
  • Regarding degree awarding powers, the government is seeking to strike down the Lords amendment that would require those seekng to award degrees to have a track record. Its replacement amendment again tries to compromise by offering improved scrutiny of the process and by involving more sector expertise in the decisions. This is inadequate given the plans the government has to award probationary degree awarding powers on the basis of recruitment policies.

 

 

Overall, I find it hard not to feel that Labour, UUK and GuildHE have missed the main issues around probationary degree awarding powers and like Alison Wolf I would have preferred to let the bill die than allow that to move forward. Particularly as the new guidance on DAPs, like the new guidance on university, has not yet been put forward for consultation.

 

 

Thursday – lunchtime talk at Keele

Title: The New HE Settlement: standards, excellence, value-add and finance

Date: Thursday 27 April

Time: 1-2pm (with refreshments from 12.30)

Venue: The Salvin Room, Keele Hall, Keele University.

The talk is free and a place can be booked here.

Outline

This summer’s White Paper for Higher Education, Success as a Knowledge Economy (backed up where needed by the Higher Education and Research Bill now passing through parliament) represents a new settlement for English universities and colleges; a settlement to replace that of 1992/93 when the binary divide was dissolved and the polytechnics were brought into the university funding fold.

This new settlement might be best characterised as a response to a breakdown in trust between the government (as funder) and universities as providers of undergraduate education.

The expansion of undergraduate places over the last two to three decades has not been accompanied by the predicted increase in British productivity. Government, most pertinently Treasury, faith in the generic value of a degree in human capital terms has been undermined in the last ten years. The White Paper therefore heralds an intervention in settled notions of institutional autonomy and academic freedom. In particular, Hefce, its planned replacement the Office for Students and the government have reinterpreted their powers and remit to extend to standards, not just ‘quality’.

The four-pronged justification for this reorientation would be characterised by degree inflation, student dissatisfaction, graduates in non-graduate jobs and employer complaints about graduate abilities. Lurking in the background a further dimension has become clearer – the government as investor has not seen the expected return: an increase in graduate salaries. The latest data from the new Longitudinal Education Outcomes project (LEO) indicates that one quarter of those in work ten years after graduating are earning £20,000 pa or less.

These results, opinions and findings have led to new government-commissioned research into the ‘value add’ of particular degrees and institutions, which will dovetail with the development of new metrics and measures for the later phases of the teaching excellence framework, including tests for generic learning gain.

This talk will outline these developments and the contours of the next decade of HE policy as it is motivated by the government’s economic and financial considerations and what the resulting new ‘financialised’ framework will mean for the sector.

Interest rates & How Not to Write About Student Loans

March RPI, the figure used to determine annual interest rates on student loans, was published this week. It has risen to 3.1% – a near doubling from last year’s 1.6%.

In September, those on old-style mortgage loans will see their interest rise to 3.1% for 2017/18.

Those on loans taken out between 1998 and 2012 benefit from a clause that sets interest at the lower of RPI or bank rates plus 1 percentage point. The bank base rate is currently 0.25% meaning that borrowers with these loans are seeing interest accrue at 1.25%. That base rate is expected to rise in the next 18 months – possibly more than once – as it does so the interest rate on student loans will climb with it. From September, the new RPI figure will set an upper limit on interest in 2017/18 of 3.1% (it will be 1.6% until then). (That is, despite media reports, the base rate today does not fix the interest rate for 2017/18, but the March RPI will set an upper limit for the year).

For student loans issued to those who’ve started an undergraduate course since 2012, there is a different arrangement. Interest rates while studying are RPI plus 3 percentage points, so that will rise to 6.1% for the year starting in September. After a student leaves their course, interest accruing is set by a taper determined by earnings: those earning £21000 per year and under see RPI; those earning £41000 and above see RPI plus 3 percentage points; those earning in between those two points receive a proportionate rate. That means that for 2017/18 there is a sliding scale between 3.1% and 6.1%. (The new postgraduate loans do not have the interest rate taper and borrowers face interest accruing at RPI plus 3 percentage points throughout).

Now for my standard complaint.

Student loaned issued to those starting since 1998 are income contingent repayment loans. This means that comparisons with commercial loans that only look at interest rates are misleading.

With commercial loans, you will be expected to repay the principal borrowed and all  of the interest accruing and you will be expected to do so relatively quickly.

Income contingent loans are designed to mimic a proportionate graduate tax: a borrower may not repay the principal, let alone the interest. The government currently commits to writing off any outstanding balance thirty years after repayments fall due. Looking at the interest rate on ICR loans without looking at how that interest translates into repayments is misleading. (It is also important to understand the time value of money as cash amounts paid back in 10 years are not necessarily of lower value than higher cash amounts paid back over 30 to 35 years).

The chart below is from a 2015 Institute of Fiscal Studies report and is a little out-of-date in relation to the current government’s discount rate for student loans, but otherwise it gives a good illustration of the difference in repayments made under the income contingent repayment scheme. Even with graduate debt around £50 000, the net present value of repayments for the majority of borrowers is well below that principal.

IFS figure 4

All loans should be judged by the value of the repayments demanded. When evaluating commercial loans the interest rate is the good shorthand, but income contingent repayment loans are much more complicated and the repayment threshold of £21 000 lowers repayments and provides the kind of protection to borrowers that is simply absent from commercial loans.

This basic point about income contingent repayment loans is particularly important as commercial lenders  – whose repayment conditions will be more onerous and most likely more expensive for everyone other than those who go on to be very high earners – isolate the interest rate comparison and use it to mislead potential borrowers.

It is therefore very disappointing that a Guardian personal finance journalist has churned around a press release from “Save the Student” and made all these mistakes (and more). The article never mentions how income contingent loans work (the brief reference to a repayment threshold doesn’t explain income contingency) and leaves the reader with the suggestion that commercial loans or (re-)mortgaging might be a cheaper way to finance study. They aren’t likely to be: in addition, SLC Student loans have built-in insurance, they are written off in the event of the borrower dying or becoming unable to work through disability.

By all means criticise the cost of English HE – I do – but don’t thereby drive potential students into the arms of commercial lenders and much more onerous debt.