The cost of writing off tuition fee loans

The Green Party manifesto pledges to write off all outstanding student loan debt.  It estimates that this would mean foregoing £14billion in loan repaments over the course of the next parliament.

Unfortunately, serious consideration of this proposal has to sidestep the Greens’ own analysis, which is amateurish.

Firstly, the OBR figures cited by the Greens are for the whole of the UK, whereas HE is devolved issue and the UK government only has oversight of the English system. To measure the short-term cashflow impact on the national finances of abolishing English student loan debt (also includes tuition fee loans made to EU nationals studying at English universities) you need to subtract roughly £0.3bn per year to exclude the repayments being made by students from the rest of the UK. This brings the short-term cashflow figure down to about £13bn.

Secondly, you have to ignore the fact that they are using a 2014 figure for the estimated impairment on student loans: the estimated difference between the value of loans made today and the value of associated repayments received over the next three and a bit decades (discounted). I recently explained why this much-cited 45% figure is out-of-date and misleading.

Thirdly, you need to realise that the Greens are wrong: you can put a value on the long-run cost of the write-off in terms of all future repayments foregone and indeed it’s done every year in the relevant departmental accounts. In the BIS accounts for financial year 2015/16, the face value of the English loan book was £76billion (the total of all outstanding balances added together at 31 March 2016). But the estimated value of future repayments associated with those loans is the fair or carrying value: £57bn. This isn’t exactly like the cashflow figure cited in the first paragraph since it is discounted figure giving a net present value, but it does tell you what the government thinks the loans are worth as a financial asset.

In fact, the cashflow approach is a little misleading. National accounting conventions would translate these lost future repayments into an impact on capital expenditure today. That figure would be closer to the face value (£76bn) than the fair value (£57bn) of the asset.

I’ll give a simplified version of what happens.

In financial year 2015/16, £11.46bn of new loans were issued (face value). These were expected to generate the equivalent of £8.826bn in repayments (fair value) before the accounts are closed. The government is thereby anticipating that the loans are impaired: the generate less than was lent. But as financial transactions neither the outlay nor the repayments affect national income or expenditure until accounts are closed (when the capital expenditure figure is recorded).

If it had closed those 2015/16 accounts immediately and written it all off, it would have lost £11.46bn, not £8.826bn (what it thinks the asset is worth) – ie it would simply have spent £11.46bn.

Now with loan accounts that have been open awhile this gets more complicated because there are repayments and interest etc. But the basic point is that the government’s “loss on loans” is the difference between original outlay and repayments received and with the latest loans it doesn’t expect to determine that figure until it closes accounts. The loss then scores in capital expenditure when that closure occurs (in the unfortunate event of death or disability or when the accounts are closed in accordance with the policy write-off, thirty years after repayments first fall due).  What’s important is that a write-off today brings forward that anticipated future loss and throws in whatever extra loss is implicated.

We can use those general points to address an issue raised by the Institute for Fiscal Studies in its Observation on Labour’s leaked draft manifesto. Writing about the plan to abolish tuition fees for current and starting students, IFS address the cohorts of students who have started since 2012 and faced higher fees but who will have finished before September.

There might be concerns about the equity of this; students who paid £9,000 fees would be doubly hit by large student debts, and the tighter public finances resulting from the subsequent introduction of free tuition fees. One option would be to compensate these students by clearing or reducing their tuition fee debts. This would be extremely costly, however, as the outstanding stock of loans for these graduates is around £30 billion.

IFS are correct. At the end of 2015/16, the face value of post-2012 loans was around £31billion. Given that tuition fee loans make up two-thirds of that debt, a rough calculation would suggest that clearing that tuition fee loan debt would be in the region of a £20bn cost to capital expenditure.*

Adding in another £8bn or so to clear the tuition fee loans made in 2016/17 and another £2bn (to adjust for the difference between financial years and academic years – an extra term of tuition fee loans in April 2016) would leave a retrospective tuition fee debt abolition pledge costing something in the region of £30bn. This would be a one-off hit to capital expenditure, equivalent to three years of Labour’s pledge to pay £11bn each year to abolish tuition fees and restore maintenance grants, though the latter represents an increase to current expenditure.

As a concluding aside, Labour’s manifesto costing document is concerned with a neutral impact on the current balance – how income balances current expenditure. Note that Labour’s plan to write off tuition fee loans made in academic year 2017/18 makes a commitment against capital expenditure similar to that described above, whereas the plan to restore institutional teaching grant (to support the abolition of tuition fees from 2018/19) makes a commitment against current expenditure.

*In fact, it’s more complicated, because lowering outstanding balances will also lower the repayments associated with the remaining debts. The effects of this additional impairment will be felt at different times – annually when any  interest costs to government are calculated (for pre-2012 loans) and then when accounts are closed (owing to death or disability or 30 years after repayments first fall due).