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Managing the student loan book (again)

January 16, 2015

Until recently, Matthew Hilton was the civil servant heading Higher Education in the Department of Business, Innovation and Skills. He has just written a blog for wonkhe.

Let’s look at where we are now. Fundamentally, I don’t think there is (necessarily) a great deal wrong with the way the rules for HE in England are currently set up. The evidence seems to suggest a healthy enough sector, managing its way pretty successfully through some turbulent economic times. Arguments should and will continue about the specifics of policy. But as for some of the noises we hear about long term lack of viability and holes in financial modelling stretching out generations into the future? Come off it. There’s a mixing up of apples and pears here, of stocks and flows, of facts and politics.

For example, as a matter of fact, the government could reduce the RAB charge to whatever it wanted at a stroke, and within the existing overall policy framework, just by adopting a different approach to the financial management of the student loan book. If interest rates, repayment levels etc. were able to flex in line with the macro-economic context, the RAB issue would go away. But the politics doesn’t allow for that. The requirements that matter are not those of rational economic behaviour, but of the need to manage all the angles in a way that keeps the politics on track.

It’s true the estimated loss on student loans could be managed ‘at a stroke’ by using the government’s powers to alter their terms  (repayment thresholds, repayment rate over that threshold, interest rates and write off period). These terms are ‘administrative matters’ that the government is able to change using secondary legislation: they are not fixed in the loan agreements that are signed. But the ‘rational economic behaviour’ invoked here is the power of this particular lender to generate more repayments from the borrower.

The lending agreement for traditional commercial loans fixes the nominal repayments and the period of repayment in advance at the point of agreement (you know what your outgoings are in cash terms even if you don’t know the real value of that cash payment in the future). Income contingent repayment loans are different. You do not know what your nominal payments will be for the thirty years after you graduate, because they are determined by income and the four factors listed in the previous paragraph.

Hilton’s is the latest in a series of gripes from former BIS denizens about the RAB charge and the debates it engenders about sustainability. But these debates are the quid pro quo for excluding loans from calculations of the deficit (annual loan issues are not ‘spending’; repayments are not ‘revenues’). Loans are categorised as ‘financial transactions’: you no longer have your £10bn+ outlay categorised as spending but estimates of related loss  – the difference between discounted repayments and loans issued – therefore come to the fore. (With a graduate tax – which would possibly ‘flex’ in line with the broader fiscal position – that categorisation would change and outlay and repayments would be spending and tax receipts).

In the first instance, ‘sustainability’ for loans is determined by whether the budget allocated to BIS to cover that loss on loans (for example, at spending reviews) matches the latest estimates and how the accounting conventions in place treat mismatches; those conventions changed in April 2014 removing some immediate ‘fiscal challenges’ but public debate has yet to catch up.

In the longer term, concerns about the graduate labour market mean that commentators are suggesting that the commitment to uprate the repayment threshold on ‘coalition loans’ (£21 000 in 2016) in line with average earnings from 2017 be abandoned.  The ‘politics’ here is that those who have signed up for loans since starting undergraduate study in 2012 would likely baulk at changes to their promised terms.

Martin Lewis (who previously fronted an information campaign about the changes to undergraduate funding in 2012) has made his position clear. His ‘threat to the government’: he will mass campaigns against changes that affect existing borrowers detrimentally.

Former civil servants may need reminding about how much public goodwill towards HE was lost in 2010/11. Lewis’s blog should be read by them if only to alert them to that.

To reiterate the main point, ICR loans have many virtues. We do not, for example, face the immediate repayment burdens seen by US graduates. But they do involve individuals signing up to a thirty-year-plus commitment they are unable to gauge in a normal way. Borrowers do not have fixed terms and do not have the protection of consumer credit legislation. It really is not helpful to have former insiders increasing that uncertainty with their chatter. Better would be if the current status of borrowers were improved.



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