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Video: Economic Affairs Committee (with Dr Gavan Conlon)

On Tuesday, Gavan Conlon from London Economics and I appeared before the Economic Affairs Committee.

It was a long and complex session – there will be a transcript and I anticipate having to make a written submission to clarify some of the more complicated points that I tried to squeeze out before the end of the session.

But there is a video.

A corrected transcript is now available.


The session was interrupted twice by the ‘division bell’. These intervals have not been edited out of the video available. The session was suspended around 16:31, we returned very briefly around 16:47, but there was only time for Livermore to ask his question before we were interrupted again.

We returned from the second interruption at “16:59:20”.


Video: Treasury Committee appearance

A video from my appearance alongside Dr Carasso at the Treasury Committee yesterday.

Topics covered: student loans, interest rates, accounting and other related matters!

Approximately 1h45.

Update 26 October

A transcript is now available, though I haven’t had a chance to review (or correct) it.

The Chancellor on student loans

The Commons Treasury Committee has announced its own review into English higher education, bringing the number of parliamentary committee inquiries to three.

I’ll be appearing at the first oral evidence session on Wednesday, which you can watch live on Parliament TV. In preparation for that (and for the Economic Affairs committee hearing the following week), I’ve been having a look at Philip Hammond’s appearance before the EAC last month. The transcript is available here.

Hammond’s is a guarded performance. His appearance occurred before the Conservative party conference and before the changes to loan repayment thresholds and the freezing of fees was announced and confirmed.

The most interesting comments are on the sale of loans.

Hammond provides a general justification for the policy:

“It is the Government’s intention, where they find that they hold assets on the public balance sheet for which there is no policy or strategic reason, to realise those assets and thus reduce public sector debt, helping us to achieve our debt targets and/or create capacity to do other things in line with policy priorities.”

Setting out clearly that there is a preference for cash (liquid asset) over the loans (illiquid asset) because of the composition of Public Sector Net Debt – illiquid assets are excluded from that headline statistic. Alternatively, the cash can be spent to ‘do other things’.

But skirts round the issue of selling loans at a loss:

“As regards selling debts at a loss, as I said, the design intention of student loans is that they will not all be fully repaid. That is not the expectation. Clearly, there is a notional anticipated repayment level for any particular tranche of loans. Each tranche of loans has a different design structure. The market will price a book of loans, both to reflect risk and the market view of recovery rates and the market’s requirement for a discount rate.”

First, he conflates the fact that loans are ‘impaired’ (they are worth less than their face value) with the very likely outcome that loans would be sold at less than they are worth. That is, the fair value of loans (recorded in Department for Education accounts) is less than their face value, but an acceptable price might be lower still.*

Second, there is a breezy reference to discount rate, which runs together various rates: the financial reporting rate behind the fair value; the value for money test rate; and a discount that might be offered to purchasers. Unfortunately, no follow-up questions interrogated this statement. But this particular use of discount rate occured twice:

“Of course, the intention is to market portfolios of loans, and the price—and thus the discount rate—will be set by the market when a package of loans is brought to market.”

Again, there is no reference to the separate value for money test, that is meant to test whether the discount rate used by the private sector leads to an acceptable price. (This Vfm test is already skewed so that a sale that leads to a loss would pass).

Elsewhere, Hammond emphasised the clear policy commitment to a sale, but also indicated that we are still at a ‘market-testing’ phase. The tone might lead one to conclude that the government is having to go further than anticipated to get a bite from the ‘market’. It’s hard to see the recent chopping and changing of post-2012 loans not affecting market appetite for what’s on offer (and that’s before remembering that pre-2012 loans have an interest rate of 1.25% at present – well below inflation).

Asked directly about the fiscal illusion of scoring interest accruing as income in the national accounts, Hammond deflected by making vague reference to the general problem of recognising impairment. On other matters of detail – the target RAB and the discount rate change brought in by his predecessor in 2015 – he admitted ignorance.

In light of what we now know, you could also scour the comments on general ‘value for money’ in the fee-loan regime for clues as to what a coming review will look like.

“As far as I am aware, there are no alarm bells at the moment telling me that we should review value for money from a policy perspective. There is clearly another aspect, which is value for money to the individual, and the situation the individual finds themselves in. There is a significant difference between a graduate who leaves university with a significant level of debt and a well-recognised degree in an area known to provide strong employment opportunities and, on the other hand, a graduate who has a similar level of debt but may not have a degree that will enhance his or her employment opportunities in the same way.

“We have a responsibility to look at the way the system is working in practice. It is probably fair to say that the original expectation was that there would be a bigger range of outcomes in relation to fees charged than has actually turned out to be the case.”

So again – we see reference to differential fees (recall May’s recent focus) and reference to gradautes with large debts but limited employment opportunities.

You might want to combine those concerns with the ‘perverse incentive’ he’s been alerted to in the system.

“It is a matter of concern, which several vice-chancellors have drawn to my attention, that universities incur significantly higher costs in teaching some subjects compared with others, and the funding system does not reflect those higher costs in a way that necessarily incentivises universities to focus on increasing their STEM teaching. Indeed, some have argued that there is a perverse incentive in the system, in that they can generate surpluses in relation to some of the humanities subjects that are cheaper to teach.”

It’s hard to see how the current market mechanisms can eradicate that incentive. It will probably require the imposition of subject-level limits on fees or loans.


*The government has indicated that it is prepared to sell loans for less than they are worth. Whether this is a good or bad position depends on how far it is rational for government to prefer cash today over holding a financial asset that will realise its value for several years. Most commentators, myself included think it’s approach is misguided and driven by a misplaced short-termism or obsession with presentational matters (like PSND) over genuine concerns for fiscal health. The level of this short-termism can be gauged by the difference between the financial reporting rate and the VfM rate: RPI plus 0.7% against RPI plus 3.5%. That’s a big difference.

What this isn’t though is: “like buying a sofa on HP then selling it cheap on eBay to pay the grocery bill”.

The government has loaned students the money to study (to buy the sofa) and then wants to sell the loan (or at least the income stream associated with the loan): the student still has the education (or the sofa).

And the government used to provide sofas for free, so would be in a better cash position after a sale than previously. There are really three stages to the analogy:

  1. Providing sofas to students for free;
  2. Providing loans for students to buy sofas;
  3. Selling the loans.

The position at 3 is better than the initial position (1) in cash terms, but is 3 better than 2? How should the government value the financial asset compared to cash?





HoL Economic Affairs Committee inquiry – oral evidence starts today

The House of Lords Economic Affairs Committee is running an inquiry into tertiary education. It’s holding its first oral evidence sessions this afternoon. You can watch Paul Johnson (IFS) today at 3.35pm.

Sessions will be held weekly in that slot. I will be appearing with Gavan Conlon of London Economics in a fortnight.





Loan repayment thresholds announced

Jo Johnson provided a written statement to the House of Commons yesterday, which confirmed that maximum tuition fee levels would be frozen for 2018/19 and that the loan repayment threshold for post-2012 loans would increase to £25 000 this coming April and then be uprated annually in line with average earnings (undoing Osborne’s 2015 freeze and more). The lower threshold for the interest rate taper will also rise to that level, while the upper threshold will increase to £45 000, with the taper maintained at RPI to RPI + 3 percentage points.

The repayment threshold for pre-2012 loans, currently set at £17 775 will continue to increase in line with RPI, while the threshold for postgraduate loans will remain frozen at £21 000. PGT loans now look an even worse deal as their interest is fixed at RPI +3pp (no taper) and so can prove expensive for those who earn above the threshold, but not enough to erode the debt quickly. Since the loan limit is only £10 000 in total, PGT borrowers are likely to repay a higher percentage of interest.

Back to post-2012 loans: a major review is likely to be announced at the Budget on 22 November. Even if the Treasury had had a welcome change of heart and was prepared to support greater investment in HE, this isn’t the way to do it.

London Economics and the Institute for Fiscal Studies have costed the measure independently and concluded that it would cost at least £2bn per cohort of borrowers (IFS: £2bn; London Economics: £2.78bn), with the RAB charge rising from around 30% to 45%. That is, for each £1 lent, the government would expect to get back 55p … which leads us to the problematic optics. The loan subsidy is opaque and much harder to present to the public than lower or zero fees (as a result of direct teaching grants to institutions).

Without futher review, the scheme is more expensive than what we had before 2012, fees are over £9000pa, graduating debt is still enormous, and the interest rate is unchanged. An expensive measure which benefits almost all borrowers will scarcely address the concerns aired continually in the press over the last year. (Although a repayment rise benefits all existing borrowers and that would appear to have advantages over Labour’s offer of zero tuition to future students, Labour’s interest in debt write-offs would come into the picture here.)

Moreover, from the Treasury point of view, repayments from all post-2012 cohorts will be lowered immediately, thus affecting cashflow and short-term projections for public sector net debt.

As I said in the previous post, I expect a review to look at loan outlay, not just fee levels.  The Conservative line against Labour has to be that undergraduate study is worth it and that requires making value for money the focus. From both lender and borrower perspective, you want to focus on lending less so that what goes unpaid is reduced. It seems unlikely that Hammond will want to replace loans with teaching grants (except in specific subjects like engineering and mathematics), so institutions (and staff) should be preparing for some delayed austerity and may need to think about how they would operate in an environment where the tuition fee loan on offer to their students did not match the maximum tuition fee.



May blinks on loans and fees

Last Sunday saw Conservative leakers floating several options regarding the reform of English HE financing; today sees Theresa May confirm what has been clear for months: that planned rises to the maximum tuition fee have been shelved beyond £9250pa for the time being. More promising for borrowers is the pledge to increase to increase the repayment threshold from £21 000 to £25 000pa (and apparently to index the threshold to average earnings thereafter). This benefits the majority of borrowers in the near term – immediately saving a maximum of £30 per month for those earning over the new threshold . In the long run, this should benefit almost all, though very high earners may have a complicated decision to make about voluntary additional repayments (the trade-off between avoiding RPI +3pp interest and losing the ‘insurance’ features of ICR loans).

Unfreezing the repayment threshold undoes some  of the damage inflicted by Osborne in 2015. But it is much harder to restore public goodwill towards the fee-loan regime. All this chopping and changing serves to remind people that income contingent loans are also policy contingent and that an individual – May – can apparently make major alterations to the scheme for what ultiamtely are reasons of political contingency.

Can we still go through the pretence now of telling university applicants what they are likely to repay? We’ve barely got through 2 years of loan repayments and the scheme has been changed twice; loans last roughly 35 years.

Critically, what leaves you on the hook to future policy changes is the graduating debt. It becomes very hard to ignore the debt (plus interest the accruing) and focus on the lower mandatory monthly repayments today. This uncertainty for borrowers needs to be reduced and that imperative shouldn’t be overlooked when cheering the real benefits to post-2012 borrowers this announcement brings.

And, of course, that last point only focuses the political optics: how does this compare to Labour’s offer? May has targeted existing and new borrowers; Labour’s election pledge is now on offer to future students.


There is also to be a fundamental review. One which will apparently tie course funding to graduate outcomes. I’ve been writing about the shift to a system based on creditworthiness of institutions and borrowers for a few years now (a pithy outline can be found as a chapter in the new book, The Death of Public Knowledge). We used to fund HE on the basis of cost of deliver; we are edging towards one explicitly built on likely ability to repay loans (and at the same time contribute to central coffers through higher income tax).

What that might mean for a review isn’t straightforward, since the government has been attempting to reconcile two incompatible features: competition of price and quality funded by an ICR loan scheme that mimics a graduate tax. The loan scheme means that the headline fee is not a price.

Imposing differential course funding admits that the original market reforms were misguided. This could be done in two ways – by setting out a schedule of maximum tuition fees (e.g. against benchmarked targets for earnings outcomes rather than old-style Hefce banding) or by limiting the amount that the SLC is prepared to lend to different courses.

I would expect attention to be paid to the latter: it won’t make HE funding less complex, but would sidestep issues around institutional autonomy and would allow institutions to seek alternative financing arrangements for their students (or move to a model seen in the US where high sticker prices are only paid by some, who fund fee waivers for others).

(If you had stakes in TEF, I’d be making a SELL recommendation).


New public course: Coding for Beginners

Fine Art Maths Centre (which I help to run at Central Saint Martins) will be offering a new public course this Autumn.

In collaboration with The Photographers’ Gallery, we will be running a version of our popular, introductory progamming course on Monday evenings from 30 October 2017. ‘Coding for Beginners’ teaches Processing from scratch. Processing  is a variant of Java tweaked for visual practice. As with all our courses: no prerequisites required.

Our courses at Citylit for 2017/18 include:

Introductory course

Philosophy & History of Mathematics: A Brief Introduction
Two Saturdays  – 25 November & 2 December

More advanced 10-12 week courses

Philosophy of Mathematics 2: Arithmetic (Spring 2018)

Advanced Philosophy of Mathematics: Gödel (Summer 2018)

Reasoning with Uncertainty (Summer 2018)