Student Loan ‘defaults’
A story in today’s Daily Mail quotes a ‘senior’ Treasury source on the student loan scheme:
‘The Treasury are all over this and are extremely worried about the viability of the system. They are taking a very long-term view but their estimate for non-repayment keeps going up. It is not helped by the recession, which means graduate incomes are going to be lower than they hoped.’
The Mail misinterprets the headline statistic as ‘4 in 10’ students may default. But one cannot default on student loans – the 40 per cent figure reflects an estimate of the total write off on outstanding loan balances which is scheduled to occur 30 years after graduate repayments fall due. For those who started their studies in 2012, this is likely to be 2046.
That is, on average for every pound lent, the Treasury apparently expects to get back only 60 pence after 30-35 years (in net present value terms).
My book, The Great University Gamble, which treats this issue in detail, went to press when the official figure for this estimate was 32 per cent. It is now openly acknowledged to be 34 per cent but will climb as the economy and graduate salaries stagnate.
This figure matters for two reasons:
- first, if it climbs above 40 per cent then whether the new funding regime actually saves money on its own terms becomes moot.
- second, because of the way the accounting works an estimate of the non-repayment written off in e.g. 2046 is set aside now as an impairment. If this figure continues to climb over the lifetimes of the loans, then it will be up to future governments to do something about it and the current lot who introduced the new regime may begin to look irresponsible.
To clarify, the Treasury maintains a hedge against the BIS models. It charges BIS / Student Loan Company RPI + 2.2 interest for the borrowing used to back the student loan scheme. This is higher than its own current cost of borrowing. The ‘break even’ point referred to above is therefore for the HE budget rather than the government. And under the 2012 innovations, students and graduates themselves face real rates of interest – 6.6 per cent in 2012/13 for those who started last September.
The nominal value of aggregated, individual, outstanding balances written off in e.g. 2046 is NOT the estimated loss on the scheme.
The loss on the scheme – non-repayment rate – is loans issued set against repayments received in net present value terms (ie with interest and inflation factored in).