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The misleadingly named Student Loans Company

Why that title?

Well, the name seems to mislead people into thinking that the provider of student finance is a private institution, potentially making profit out of students, when it is in fact publicly owned.

There are 20 shares in the SLC: 17 are owned by the Department for Education (which has responsibility for English-domiciled students) and another three, each of those owned by one of the devolved administrations.

When you want to see what’s going on with student loans you look at government accounts: national, departmental or those of devolved administrations.

OK. So what’s the point of mentioning this factoid?

I believe that the misunderstanding about the publicly-owned nature of the SLC contributes to thinking that leads to other confusions, such as those surrounding function of the interest rate in student loans and what the effect of reducing them would be.

Here’s a former Higher Education minister getting into a pickle in an article that even has the title, “Student Finance? It’s the interest rate, stupid”.

Let’s leave aside the misunderstandings about the recent ONS accounting changes and concentrate on the claim that reducing interest rates would “address the size of the debt owed itself”.

The government is looking to reduce public debt, but lowering interest rates would only do this in the long-run, if the loan balances eventually written off were written off by making a payment to a private company to clear those balances.

As it is, reducing interest rates on loans mean that higher earners will pay back less than they would otherwise and government debt would be higher in nominal terms (all else being equal). (I do support reducing interest rates on student loans, but for different reasons).

There is probably another confusion here regarding the Janus-faced nature of student debt: it is an asset for government (it is owed to government) and a liability for borrowers. The outstanding balances on borrowers’ accounts are not the same as the associated government debt.

When the government thinks about public debt in relation to student loans, it is thinking about the borrowing it had to take on in order to create the student loans.

Imagine that I borrow £10 in the bond markets to lend you £10 for your studies: I have a debt to the markets and an asset, what you owe me. The interest on the former and the latter are not the same and the terms of repayment on the latter are income-contingent so I don’t expect to get sufficient repayments back from you to cover my debt to the markets.

Student loans are not self-sustaining. It requires a public subsidy – any announcements about loans in the spending review at the end of the month will be about how much subsidy the government is prepared to offer.

Markets and Suppliers: HE and Energy

David Watson once wrote that the answer to the question as to whether universities were in the private or the public sector was “yes”.

He suggested that universities most resembled BAE Systems: a private company with a host of public contracts. Back in 2011, the Coalition white paper on HE opened by trumpeting “Higher education is a successful public-private partnership: Government funding and institutional autonomy.”

It was always the aim of second round of public sector reform (“Privatisation 2.0”) to create an education market that could be regulated like public utilities in the UK. And so the recent spate of collapses amongst energy “suppliers” prompted me to think about Watson’s comments through the lens of bankruptcy.

The measures taken by the regulator, Ofgem, reminded me that the government has pledged to take a similar approach to university “failure”.

Last summer’s announcement from the Department for Education of an HE “Restructuring Regime” (HERR) was badged as a Covid-related, “last resort” and outlined general principles covering possible government support pre-bankruptcy.

Consistent with earlier statements regarding its approach to the orderly exit of “unviable institutions”, the opening sections of the HERR made things clear:

§4 The Regime does not represent a taxpayer-funded bail-out of the individual organisations which make up the higher education sector. It is not a guarantee that no organisation will fail – though current students would be supported to complete their studies, either at that institution or another.

Providers approaching DfE for support will be considered on a case-by-case basis, to ensure that there is a sound economic case for government intervention, with loans to support restructuring coming from public funds as a last resort.

A precedent here can be seen in the “Task Force” established in 2012 when the government rescinded London Metropolitan’s right to sponsor international students.

There, a “clearing house” was even established to distribute around 2000 affected students to alternative courses at different providers.

HERR made the priorities clear for its case by case consideration of whether to lend to an institution that had exhausted all other options and ‘would otherwise exit the market’:

  • the interests of students;
  • value for money;
  • maintenance of a strong science base;
  • alignment with regional economies;
  • support for “high quality courses aligned with economic and societal needs”.

Elaborating on the last of those, the 2020 document unsurprisingly picked out “STEM, nursing and teaching”. In sum, an institution in difficulties would be required to show that:

(i) it had a plan for future sustainability;

and (ii) that its collapse ‘would cause significant harm to the national or local economy or society’.

Alongside those points, it is worth recognising that it will be easier for the government to be sanguine about the disappearance of smaller institutions in areas that are otherwise well covered by universities (e.g. London).

Those that would be offered help will still find the “Regime” a deeply unpleasant experience: they mean it when the write about a “last resort”.

A bankrupt university will prove a bigger problem than an energy provider. But it is clear that the government will aim along those lines, such that a university bankruptcy will not be like a local authority issuing a “section 114”.

One should therefore reject any idea that financial deficits do not matter for universities.

Like private companies they face cash constraints. They can support an excess of expenditure over income so long as the cash outflow can be absorbed by cash reserves. When the latter are exhausted and debts cannot be settled as they fall due, then the institution will fall over without outside support.

Popular critiques of austerity and theories about governments and money might have misled people here.

Governments are not like households, but universities are, insofar as they need to generate more income than they spend.

As Watson noted, his answer about BAE Systems would make a lot of people uncomfortable. It’s even more discomforting to think that the government might view universities more like Igloo, Symbio, Enstroga et. al..

UPDATE – 7th October

By coincidence, DfE has just announced the closure of the “Regime” to “new applicants” with a deadline of 31 December 2021. They aim to move all applications “to a conclusion” by July 2022.
This decision reflects the fact that HERR was a pandemic measure, but, as I outlined above, the process and criteria set out there do give some indications as to how the department and regulatory bodies will approach bankruptcies in general.

Student loans: what counts as expenditure in national accounts

Economic & Fiscal Outlook, Office for Budgetary Responsibility (March 2021), adapted from Tables 3.14 & 3.26

I have constructed the table above from forecasts for Total Managed Expenditure and Financial Transactions taken from the Office for Budgetary Responsibility’s latest publication (it accompanied Wednesday’s Budget).

It shows how newly issued student loans are now split into two components for the purposes of presentation in the National Accounts. The portion of loans that are expected to be repaid are classed as “financial transactions”, while the portion expected to be written off is recorded as capital expenditure. The latter scores in “public sector investment”, which was adopted as a new fiscal target prior to the pandemic (net investment cannot exceed 3% of national income), though the rules are currently under review.

We can see that student loan outlay is expected to reach £20billion in the year to March 2021, rising to £23.6billion in five years’ time.
The majority of new outlay is now expected to be written off and that share rises over the forecast period.
By 2025/26 repayments on all existing loans are projected to re000000000000000ach nearly £5billion per year. (This figure has improved since the sale programme for post-2012 loans was abandoned, since the treasury now gets the receipts that would have gone to private purchasers).

As mentioned in recent posts on here, the Department for Education only currently has an allocation of £4billion to cover the capital transfer / grant element of new loans and so it has to be granted large additional budgetary supplements each year. This situation has dragged on as the planned spending review has been postponed. We can now expect developments in the Autumn.

New contingent liability recorded against student loan sales

Last week’s Supplementary Estimates contained another note of interest for student loans.

Under “Note K: Contingent Liabilities” (p. 90) we find that a fifth contingent liability has been added to those associated with the now abandoned sale of student loans.

The sale of student loans necessitated warranties and indemnities to secure interest and obtain value
for money from investors. These contingent liabilities are in respect of:

e) New EU Securitisation Regulations (Possible CL [contingent liability] in due course). UKGI [UK Government and Investment] are seeking legal counsel to review the implications of new EU securitisation reporting requirements from 2019. Credit granting criteria are being assessed for student loans which may generate legal challenge and we will continue to work with UKGI to update as more information and analysis becomes available.

If any reader can explain what the issues may be here, I would be very grateful.

The original four contingent liabilities are discussed here. These, along with the fifth, are still classed as “unquantifiable”.
There were also issues around whether the Special Purpose Vehicles for the securitisations were sufficiently independent of government so as to constitute a genuine sale (and thereby transfer the loans off the government’s balance sheet).

The wording above though suggests that the lack of “credit” checks on student loans may be the issue.

DfE gets over £13.5billion extra for 2020/21 loan impairments

The UK government published its “supplementary estimates” for 2020/21 yesterday. These allocate additional budgetary resources to departments.

Education has been given an extra £13.531 billion to cover the estimated losses on student loans issued in the year (April 2020-March 2021) and the likely downwards revisions to the value of already existing loans. The department had an original allowance of roughly £4billion, but was determined by the last comprehensive spending review and had not been revised since Theresa May’s decision to increase the loan repayment threshold in 2017.

Last year, an additional £12billion was granted and most was used. (These allocations are not additional cash, but the formal recognition that the cash issued in the form of loans is going to generate much lower returns than originally anticipated).

The estimated non-repayment on new loans was thought to be in the region of 55%. That is, for every £ loaned, the treasury expected the equivalent of c. 45p in return: in 2019/20, £17.6billion of new loans were issued, but only around £8billion in net present value is projected to be repaid. (Note that this percentage figure – “the RAB” – is often confused with a measure of how many borrowers ultimately clear their loan balances, i.e. those who repay the equivalent of 100p or more).

When the new higher fees came in, the loss on loans was projected to be in the region of 30p in the £. That is, 70p would be repaid. A raft of policy changes and modelling errors along with the impact of austerity on graduate earnings has dramatically increased the costs; recent accounting changes have meant that those costs now show up in the headline figures that count. (The loan scheme was never designed to be self-financing, but no one set out to develop a scheme with this current level of subsidy. The £4billion in the original budget for 2020/21 reflects the much earlier aim of “incentivising” the department responsible for loans to get the estimated non-repayment closer to 30-35%).

The pandemic has made things a lot worse for earnings and livelihoods. But the HE sector has in recent months also been positioned to take a hit when the chancellor looks to review spending in the Autumn. The obvious place to look is initial outlay and so I would expect to a clamp down on undergraduate fee levels (without any offsetting increase in tuition grant).

DfE committed to £200m of contracts for loan sale that’s not proceeding

Page 221 of the Department for Education’s 2019/20 financial statement contains the note reproduced above.

The sale programme for “pre-2012” student loans was cancelled in March. But DfE looks like it will be paying out over £30million per year for the next few years to financiers anyway. Total liabilities are booked above at over £220million.

£11 billion of “Supplements” used for loans

Given the relative absence of higher education from yesterday’s Autumn Statement, I turned my attention to the Department for Education’s 2019/20 annual accounts, which were published earlier this month.

Regarding student loans, we have been in something of a hiatus since 2018, when Theresa May announced an review of post-18 funding and commissioned the Augar panel, which reported last summer. Although there were suggestions that we might get a long overdue response to the latter yesterday, we will probably have to wait now until the Budget next March, when the government will hope to have a better sense of its spending commitments.

That leaves student loan finance in limbo with the small, nominal budget allocation for loan write-offs shored up by large “Supplementary Estimates” provided by parliament each February.

This is in spite of an apparent “target RAB” of 36% and a budgeting process hanging over from 2014, when the old department for Business, Innovation and Skills (BIS) had responsibility for loans and was being “incentivised” to reduce the cost of the loan scheme. You can see both of these features still stipulated in the latest Consolidated Budgeting Guidance, but they represent zombie policy with little to no bearing on events.

Why so? Well, DfE was given an extra £12billion plus back in February to supplement 2019/20’s budget for “non-cash RDEL” (mostly student loan “impairments”) of £4.7billion per year. (Student loans are “impaired” because the loans are worth less in estimated repayments than the cash advanced.) The supplement produces a total that is more than triple the original allocation.

And… DfE managed to spend nearly £16billion of that last year. The accounts report an “underspend” of £1.1bn against that total.

As can be seen from the table below, “Fair Value movement” for student loans amounted to a non-cash cost of over £14billion.

£17.6billion of new loans were issued, a net increase of £15billion once repayments of over £2billion are considered, but the new impairments on post-2012 loans increased by £12.3billion; for “pre-2012” loans the stock remaining at year-end lost nearly £1.7bn when revalued.

Although the nominal value (“face value”) of outstanding post-2012 loan balances is nearly £105billion, those loans are thought to be worth less than £50bn.

Read more…

End of student loan sale programme

There was a lot going on in mid-March and I somehow forgot to add a post when the government announced that it was ending its student loan sale programme.

I had predicted this in January and that post contains a full explanation as to why such a decision was likely.

In short, it’s because there was no longer a presentational advantage from the sale and the accounting change introduced by the ONS meant that the losses on sales (the difference between cash raised and book value) now hit the headline fiscal statistics.

New Governance Code

The Committee of University Chairs has published an updated Governance Code.

I’ve worked extensively with union branches over the last year and I think one points is worth citing from the Code, since it warns against behaviour seen at some universities.

There is only one category of governor / trustee, regardless of how they are appointed to the governing body.

§1.4 All members of the governing body (including students and staff members) share the same legal responsibilities and obligations as other members, so no one can be routinely excluded from discussions. All members have a duty to record and declare any conflicts of interest.

I would add to my emphasis above by suggesting that this also means that members who are elected by staff or nominated by trade unions should not be prevented from seeing papers that have gone to committees.

§3.2 Members of governing bodies need to act, and be perceived to act, impartially, and not be influenced by social or business relationships. Institutions must maintain, check and publish a register of the interests of members and senior executives.

A member who has a professional, pecuniary, family or other personal interest in any matter under discussion which may be seen to conflict with the best interests of the institution must also disclose the interest in advance of any discussion on the topic.

A member does not have a pecuniary interest merely because they are a member of staff or a student.

(Again my emphasis.)

Liquidity in Wales and England

After my July UCU presentation on institutional finances, I was asked what the situation in Wales was with regard to liquidity and regulation.

Office for Students currently requires institutions to alert them if liquidity falls below 30 days.* This “reportable event” is designed to give the regulator notice that intervention might be required or a “market exit” managed.

It is not to be confused with a prudent level of liquidity. Most universities would specify the equivalent of 45-60 days as required for the “working capital” needed to cover daily activities.

The HEFCW Financial Management Code  doesn’t specify a minimum level, but requires Welsh HEIs to be more liquid.

86f. The institution must ensure that it retains sufficient liquid cash or equivalents to service working capital requirements as well as a prudent level of liquid reserve to be called upon in the case of extraordinary events;

This reference to prudence indicates that Welsh regulation is still aligned with Charity Commission guidance for charities to be able to cover 90 days of expenditure. Or more pointedly, it indicates the difference between the regulation of a quasi-public service and the market competition seen in England.

Some English universities did reason that they didn’t need to have so much cash and near-cash to hand as they weren’t reliant on donations and so income was more predictable.

The last few months have undermined that argument: projected income for 2020/21 has moved dramatically. Those institutions without significant liquidity (which can incorporate overdrafts and revolving credit facilities) were moved to push the expected shock from Covid on to operating budgets and staff pay and conditions. This was clearly bad practice and has affected staff goodwill, even if budgets now look very different for this financial year.

If universities manage to avoid a financial shock from the pandemic, many need to recognise that they were not in a good position. The idea that liquid reserves hoard resources that would be better invested in buildings seems to have had widespread currency. This year should really produce a rethink about the merits of “efficient” or “lean” approaches to treasury practice.

Had the pandemic arrived with the kind of impact that many universities were modelling, then some would have been lucky or unlucky depending on where they were in their capital development cycle. If they had borrowed to invest and not yet spent the money, they would have got through. If they had spent the money …

That’s not good enough. It’s bad governance not to have contingency or “rainy days” funds.

*The “liquidity days” measure calculates the number of days of average expenditure that an institution can cover from cash and current investments (things that can be readily turned into cash like deposit accounts with notice periods) if income were to dry up. It measures the ability to deal with a short-term shock.

Calculations vary but a typical measure would see annual operating expenditure less depreciation and adverse pension movements (both non-cash expenditure items) divided by 365 to give the average daily expenditure. The amount of cash and current investments on hand can be then be used to arrive at the number of days that can be covered.