RAB hits 45% – but what does that mean?

As official notes go this one appears pretty anodyne:

“This department has been reviewing our modelling of the RAB charge on student loans. We currently estimate the RAB charge on student loans to be around 45%, which reflects our current estimate of the costs to government of the higher education subsidy to students.”

What it means is that for each £1 issued as a loan on average the government only expects to receive back 55p in net present value terms – the relevant cashflows last for 30 years after repayments first fall due. The RAB charge is the impairment set into accounts and budgets in the year the loans are issued so that the estimated longrun loss of 45p is covered now.

It’s easy to get caught up in the long-time frames and the big numbers about who will owe what in 2045 and beyond. The more immediate issue is that these estimates affect departmental budgets and accounts today.

In the 2010 Comprehensive Spending Review, BIS was allocated resource of £2.9billion to create the Resource Accounting & Budgeting charge for 2014/15. With over £10billion of loans to be issued (here the financial year does not tally with the academic year), an estimated loss of 45% would require over £4.5billion for RAB. For 2015/16, the Spending Round last summer allocated £4billion to RAB but loans issued will be around £12billion, thus requiring more than £5bn for the RAB impairment.

This puts immediate pressure on the budget. The department for Business, Innovation & Skills will have to renegotiate its resource. In the last three financial years, they have received ‘reserve claims’ totalling £7billion to deal with similar issues.

What’s different this time is that the upwards revision has been more dramatic. In the Autumn, it was newsworthy when we had an official admission that the RAB was ‘between 35% and 40%’; the Autumn Statement in December continued to use the 35% figure to calculate the additional subsidy required to fund an expansion of undergraduate places. In January, we heard 40% but also that a fundamental revisions to the models was underway. The OBR figures for estimated repayments released on Wednesday were the first fruits of that change.

With each percentage point being an additional £100m in loss, this is a big change in three months. We do now need a frank and open explanation of what is going on. Is this more significant than simply proper allowance for the effects of a prolonged recession?  These estimates already include the assumption that we return to macroeconomic ‘trend’ by 2020. And what about current HE and FE budgets? The recent cuts to institutional teaching grants may only be the first signs of broader retrenchment.

That is not where questions end. Changes to assumptions about graduate earnings and repayments also affect the already existing loans sitting on the government’s books. They may have to be written down by several billion. Moreover, we don’t yet have the specifics as to what that new RAB figure names: there are students on the former funding regime receiving loans this year (third years and above) who may be bringing down the RAB to that average of 45%.