BIS Accounts for 2014/15 shed new light on student loans

On Tuesday, the department for Business, Innovation & Skills published its annual accounts for 2014/15 along with a revised ‘simplified’ student loan repayment model, which enables those interested to play around with student loan policy and look at the impacts.

The headline from the accounts is that the resource accounting and budgeting charge for post-2012 loans remains ‘around 45 per cent’, where it has been since March 2014. (The RAB charge presents the resource needed to cover the fact that loans are estimated to be worth less than the money used to create them. The loans are ‘impaired’ in the jargon.).

Detail in the accounts shows that new loans issued between April 2014 and March 2015 came to £10.655billion and that the ‘impairment’ required was £4.619billion. The latter is 43% of the value of loans issued, but this figure is brought down because last year’s loan issue contains loans made to those still paying £3000 pa in tuition fees.

Overall, the government now holds HE loans with a face value of £64billion (the total amount of outstanding loan balances ) but an estimated ‘carrying value’ or ‘fair value’ of £42billion (the net present value of repayments generated by those balances).

That is higher than expected for one reason. The value of existing loans has been revised upwards by £2.756billion since 2013/14

There are two contributing factors:

• Changed forecasts for RPI, bank base rates and earnings improved the value of ‘pre-2012 loans’ by £1.36bn. For example, lower than expected RPI meant that the repayment threshold for pre-2012 loans will be lower than previously anticipated: £17 333 in 2015/16. (Lower RPI also means a lower discount rate).
• BIS has developed a new iteration of its repayments model. STEP3 (Stochastic Earnings Path) has improved projected repayments on existing loans by £1.4bn. A guide to these changes can be found with the new simplified model. Changes involve making a series of ‘more realistic’ assumptions about lifetime earnings ‘pathways’ and the likelihood of unemployment. But the new model also ‘ uses course subject and institution information [of recent graduates] to improve the forecasting of earnings in early repayment years’. A precursor to the Teaching Excellence Framework?

The picture on student loans has therefore improved compared to last year but underscores the volatility surrounding attempts to predict future loan repayments. In 2013/14 the value of existing loans plummeted by £2bn as a result of revisions to modelling (STEP 2). The latest iteration has recovered 70% of that loss, while changes in macroeconomic forecasts have improved the overall picture by £750million.

The previous post and this one show that we are still in the very early days of the new funding regime and in some senses it won’t hit operational maturity for another decade or two. Another revision to STEP is not planned (STEP replaced HERO in 2013).