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Lower repayment threshold & discount rates

July 8, 2015

The full text of the budget announces:

To ensure that the long term costs of the student loan book remain affordable and transparent, the government will consult on freezing the loan repayment threshold for five years and review the discount rate applied to student loans and other transactions to bring it into line with the government’s long-term cost of borrowing.

The intention to freeze the loan repayment threshold at £21 000 may apply to all those who have started undergraduate study since 2012 and taken out loans. That’s been the recommendation of a number of recent pamphlets. I’m not alone in thinking this retrospective price hike threatens goodwill towards HE. But university managements are in favour because it is likely to protect their income at the expense of graduates.

The discount rate announcement has also been flagged up in various places and is discussed by me in detail in a recent pamphlet for Higher Education Policy Institute.

In brief, Osborne’s switch from maintenance grants to loans will send estimates of loan non-repayment spiralling (little of the new loans issued will be repaid without tightening of repayment conditions). This will look bad. Lowering the discount rate would improve the headline numbers.

But that’s not the end of the story. The discount rate affecting student loans has been under review for a while and we were expecting a new one in Autumn, when the spending review sets departmental budgets for the parliament. If the rate is changed in such a way as to lower the headline rate, BIS’s budget would be adjusted downwards accordingly. We cannot assess the impact of these announcements on the department’s finances until we see the detail in the Autumn.

A second point is that there was still no confirmation of a loan sale today – it remains ‘expected’ but not confirmed. Any significant chance to the discount rate would make the loss on any sale look much worse as the discount rate under discussion here affects the value of the loans as they are recorded in the accounts.

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