Student loans – technical points

Some quick technical points about student loans and the estimated loss on them.

1. Despite rumours in the sector, there is no trigger point of non-repayment at which loans would be reclassified in the accounts as expenditure rather than lending (say 50 per cent so the loss was greater than half). I confirmed this with the ONS today.
2. The RAB charge is an impairment created in budgets and accounts to cover the estimated loss that is realised in the form of cashflows that come in over thirty years. There is a subtle difference between the RAB and the loss – the RAB is an accruals accounting convention but the shortfall represents cashflows (in and out) which are or will be real enough.
3. Net loan outlay currently scores against Public Sector Net Debt, but neither current net outlay nor estimated loss scores against the preferred measure of the deficit (cyclically adjusted current balance: lending is treated as capital not current spend). (I was mistaken when I said otherwise in 2012).
4. One can also take a snapshot of  the ‘face’ or nominal value of the loans (what it says borrowers owe the government) as this deviates from the ‘fair value’ of the loans issued as recorded in accounts (what those loan accounts are worth to the government in the form of future cashflows).
   1. This snapshot will not give you the ‘RAB’ as the snapshot is an aggregate of all loans outstanding and the government will already have received repayments against some of the loans issued.
   2. The snapshot tells you how much what you hold now is worth; the RAB is the amount set aside at the time of issue to cover estimated losses. Which means …
5. that sentences such as this are misleading: ‘The hasty revision of departmental forecasts means that by 2042, about £90bn out of the overall £200bn in student loans will remain unpaid.’ Because
   1. The total aggregated outstanding balances on loan accounts in the 2040s already tells you what is ‘unpaid’ – £200bn is owed at that point.
   2. That’s an aggregate which includes loans issued between 2013 and 2042 – that is, where there have already been – we hope – substantial repayments. You cannot read the loss off from that other figure without further information. Using the RAB of 45% to get £90billion is to confuse matters.
   3. There is also now an interest rate spread at work: real interest rates on student loan balances versus the government’s discount rate.
   4. So, all in all, you shouldn’t confuse the nominal value of the final outstanding balances which are written off with the loss: the loss is the difference between loan outlay and repayments received in net present value terms – what goes out and what comes back.
6. The reconciliation of estimates against actuals would have been occurring throughout the intervening period. So this isn’t a ‘timebomb’ – as I said in the previous post, the RAB convention requires resourcing allocations to be adjusted now to reflect these changed estimates.