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Update on student loans: four points

July 21, 2012

In the past month, there have been a number of developments regarding student loans. Here are four quick points covering terms, the mooted sale and sustainability:

  1. The Regulations governing loans issued to the cohort of new students in September have only recently been ‘made’ and passed in to law in June.The new repayment threshold of £21 000 is defined in Section 11. Notably, there is no regulation setting out the indexing of that repayment threshold to average earnings. This was the key concession which swung several Liberal Democrats behind the vote in December 2010 to raise the maximum tuition fee.No uprating of the threshold in line with earnings would occur before 2017 so the official line is: no such regulation needs to be written before then. Read that how you will.
  2. David Willetts, minister for universities and science, recently appeared before the BIS Select Committee (4 July). Parliament TV captured the session.It’s hardly compulsive viewing unless you want to play spot the errors – Willetts is obviously not a details man. One admission is telling: the government is now concentrating on selling the final tranche of the old mortgage-style student loans, the new income contingent repayment loans are apparently ‘not a priority’.Really? The outstanding balances on the mortgage-style loans currently amount to about £0.7billion. The new loans amount to nearly £40billion. Is it a question of priorities or a question of buyers (or the absence thereof)?
  3.  The Office for Budget Responsibility published its annual Fiscal Sustainability Report earlier in the month.Two issues for student loans. The first is a change to modelling assumptions, which reflects a point I made in False Accounting?:

    “2.74 We also assume that student loan fees are uprated with earnings. The medium-term forecast assumes these are uprated with RPIX inflation from 2014-15, but rolling that assumption forward into the long term would imply that university income steadily diminishes relative to the size of the economy.”

    Universities are labour-intensive operations: maintaining the fees cap in line with inflation would erode staffing given that the models used for student loans assume that earnings experience real increases (ie higher than inflation).

    But this change means that loan outlay increases, which contributes to an increase in the borrowing needed to finance loans. The OBR figures I used for False Accounting?, taken from the OBR’s March Economic & Fiscal Outlook, (but outlined in detail in last year’s FSO),  predicted the impact on Public Sector Net Debt to peak at roughly £50billion around 2030 and then to ‘fall away’.

    Here’s the latest thinking:

    “3.61 Total student loan payments increased net debt by 2.7 per cent of GDP at the end of 2011-12. The impact is projected to peak at 6.1 percent of GDP (£94 billion in today’s terms) around the early 2030s, falling to 4.4 percent of GDP (£67 billion) by 2061-62.”

    That’s quite some increase, £45billion, and isn’t solely attributable to including the loans made to students in the rest of the UK in the figures.

    Note also that repayments now do not pay back those borrowings and related interest: the debt does not ‘fall away’. There is still £67billion there fifty years away. The OBR has asked BIS to do some more modelling. No doubt to look at what looks like a permanent, structural addition to the national debt.

  4. Which leads to my fourth point: the recent IFS report on student loans. A government spokesperson has indicated that this report ‘vindicates’ the government reforms. Please note however that this report is about the distributional impact of the scheme, not its sustainability.The report contains the following proviso:

    “It is worth emphasising that our earnings simulations are not predictions of the future. This means that our analysis of the effects of HE funding policies on incomes does not represent a forecast or prediction of what we think the effects will be. Rather, it provides an estimate of what the effects would be, given our simulations of the distribution of lifetime earnings of graduates. It thus serves to highlight the varying distributional implications of different HE funding policies.”

    This disclaimed is repeated in the technical Appendix: “It is worth emphasising that our earnings simulations are not predictions of the future; they are instead simulations based on a series of assumptions. Predicting the earnings of future graduates poses more severe challenges, in particular because the distribution of earnings of future graduates is likely to change due to underlying changes in the economy, and also may itself be affected by the reforms, for a number of reasons. “

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