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Real interest rates – submission to Treasury Committee report

I’m posting this again as it connects to yesterday’s post on reducing interest rates. The pdf included at the bottom has more detail and the reminder that the Browne review recommended a real interest rebate (for those whose monthly repayment was less than any above-inflation interest accruing).

But, in general, ICR loans cannot be understood by looking at the interest rate – because payments are not made in a way that is comparable to fixed term repayment loans where the level of cash payments is fixed (and where the first payment is the most valuable!).

That a real interest rate encourages people to do so is a design problem.

Critical Education

I recommend reading the Treasury Committee’s report into Student Loans. It was published last month and is based on a series of hearings held from October to December.

I prepared a couple of private submissions before my appearance as a witness. Unfortunately I neglected to “OK” them for publication afterwards. One was on the background to interest rates on student loans; the other a briefing on accounting.

I have covered the accounting on here in detail but the interest rate piece summarises some thoughts that came together at the time. The pdf below gives some background to the following extract from the Treasury report:

The Committee also took evidence from Dr Andrew McGettigan who, when asked about the interest rate as a mechanism to introduce a degree of progressivity into the student finance system, argued that this was not the Government’s original intention.
(page 17)

The exchange referenced above…

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Lowering interest rates – why it’s essential

The Sunday Times reports today that the independent Augar review may recommend lowering interest rates on post-2012 student loans from RPI plus 0-3 percentage points to something akin to that accruing against older loans (the lower of RPI or bank base rates plus 1 pp).

Amongst a raft of other measures, I single this one out not just because its political appeal is obvious, but because it connects with the last post on the Money Saving Expert and Russell Group proposals for reforming the annual student loan statement.

What MSE/RG desire can only be solved by reducing the complexity of loans, not by presentational tweaks. Even though reducing interest rates only benefits higher earners in terms of reducing repayments, the public benefit of simplification trumps that redistributive element of the current scheme. Our current regime’s complications have a propensity to lead people into confusion that engenders harmful financial decisions: making voluntary additional repayments or paying upfront.

Setting aside broader questions about the funding of HE, it is better to forego some repayments from higher earners in order to avoid the potential to lead all borrowers astray.

Finance OhOhOh

What does it mean to say that 75% or 80% won’t repay their student loans before the policy write-off kicks in?

Read more…

Student loans – proposed form is not a fix

You’ve probably seen the coverage of the Money Saving Expert / Russell Group team-up and their proposals for overhauling the annual statements provided by Student Loans Company. Although the intentions are good, the “revamp” misfires and they’ve based a key part of their statements on an elementary mathematical blunder.

MSE and RG are keen to emphasise the “tax-like” behaviour of ICR loans by turning borrowers’ attention away from interest accruing and the outstanding balance (which is more likely to be written off than cleared). Instead, they want your focus to be on the current and future repayments.

The problem is that income contingent student loans are complex and have long lives.

Not only is it hard to give a sensible indicative level of cash repayments, it is extremely difficult to translate that projected cash total into something meaningful today. (MSE are most concerned by individuals who make additional voluntary repayments, which in most cases is throwing away money). Even if you have some familiarity with financial concepts like present value and discounting, the unusual nature of ICR loans makes such methods less reliable.

Unfortunately what’s proposed by MSE and RG makes a hash of this crucial issue: how should you understand today what repayments your student loan commits you to.

At this point, I should say that I haven’t read the accompanying report. I have only looked at the example statement. I will read the report tomorrow and blog a bit more.

The problems are located on the final page of the form: “Predictions of your likely future contributions”.

Various key assumptions are set out: repayment threshold, average earnings, salary growth, inflation and your working life. Average earnings growth of 2.7% is assumed for the next 30 years (government loan models assume AEG returns to over 4% in the long-run); the repayment threshold increases in line with that as does salary growth (no promotions or pay rises are factored in); your working life is assumed to be 30 years with no career breaks. We might quibble over these figures; we might also refer back to the previous work on this blog that forced the SLC to take down its “repayment calculator” owing to “everyday sexism”.

The first mistake seems to come with respect to inflation.

Read more…

Another Reading update: this time with some questions answered

As outlined in previous blog posts, I first contacted Reading about the money the university owes to its trusts in mid-January. On April 10th, I finally received an email responding on the record to the questions I had raised. That statement was worded in confusing fashion so it has taken a bit of time to have things clarified.

The main development: Reading has now revealed that the £120million is owed to more than one of its trusts (and not simply the National Institute for Research in Dairying – NIRD). The table provided compares the amount owing at the end of July 2018 (end of year for the 2017/18 accounts) with end of January 2019.

owed to trusts

Reading goes on to argue that these loans do not represent external debts, but interest is being levied. The university provided particular detail on the £77million owed to NIRD (though it subsequently confirmed that all the loans are being treated in the same way). The money outstanding is being 

“treated as a loan with an interest rate applied using the weighted average return on short term cash investments. Interest is payable on these sums and is rolled up in the balance on a monthly basis and recorded as such in the accounts. The sum is technically repayable on demand, and is therefore accounted as being repayable within one year. This is consistent with accounting practice for intra-group transactions. This approach has been endorsed by previous and current auditors.”

NIRD exists to advance research into agriculture and dairy at Reading. The statement goes on to specify recent NIRD-related projects at Reading:

Read more…

SOAS under “enhanced monitoring” owing to finances

Research Professional has obtained the names of seven universities currently subject to “enhanced monitoring” by Office for Students.

The list includes SOAS. In December I was asked by SOAS UCU to review the institution’s finances. I was greatly concerned by the cashflow projections and by the plan to shrink the School over the next few years. 

The Independent summarises the SOAS situation. OfS is primarily concerned about “weak operating cashflow”.

Minutes from a November meeting of its board of trustees show the university is now required to “notify the OfS immediately of any material change in the school’s projected financial performance or position”.

SOAS said the “external environment for UK higher education institutions is a challenging one, especially for relatively small and specialist institutions”.

“In line with our forecasts, we reported an overall deficit of £1.2 million for 2017-18. As our staff and students know, we are taking action to reduce costs and grow income, while protecting the student experience,” a spokeswoman added


December loan sale lost £1.15billion

£1.15billion was lost on the second loan sale in December according to the annual Supplementary Estimates, which itemise the additional budget given to government departments.

The sale raised just under £2billion, but this price was below the valuation of the loans sold in the Department for Education’s accounts. DfE has previously received assurances that the losses on the sale of pre-2012 income contingent loans would not impact on its budget and here we can see that it has been given additional resource AME to cover the sum.

loan loss

A first sale, in December 2017, lost £900million. That means the sale programme has lost over £2billion already, with three planned sales still to go. Current national accounting conventions mean these losses are not recorded against the deficit, but that seems likely to change after Eurostat advised ONS that it’s new accounting treatment should see loan sales dealt with as “capital transfers”.

Elsewhere in the Supplementary Estimates, we can see that DfE has been given over £11.7billion extra resource to bulk up the ring-fenced part of its RDEL budget that is uses to cover the estimated non-repayment on student loans issued in year (which was only £3.9bn for 2018/19). The DfE might not need all of that to cover the ballooning cost of loans, but notes indicate that the RAB charge has been pushed up by 2.5 percentage points because of “adaptations” to the department’s loan model, plus corrections to both overestimated earnings for 2016/17 and underestimated loan outlay the following year. This would take the RAB charge very close to 50%, meaning that the government only expects to receive back the equivalent of half of what it loans out today. We will get a fully picture of this in the summer when DfE’s annual report for April 2018 to March 2019 is published. (Though this might also be the last occasion on which RAB is used for departmental budgeting!)

These revisions to data and modelling also push up the cost of loans already issued, which explains why the supplementary resource is higher than 50% of the loans issued in the year to March.

Note that departmental budgeting and accounting is separate to national accounting and is governed by different conventions and practices.

An OBR update on student loan accounting changes

While today’s Spring Statement promised that the Augar review would appear “shortly” and that a government response would be forthcoming later in the year, the real HE action was located in Annex B to the OBR’s latest Economic & Fiscal Outlook.

This section – “Accounting for Student Loans” – outlined the state of play regarding the ONS’s decision to reclassify student loans in the national accounts. Although the OBR “does not yet have sufficient clarity” on the detail of the new method to include it in its forecasts (a number of issues remain to be resolved), it does now understand the difference between the approach that is proposed (“the partition model”) and its own Hybrid model (published last summer).

The fundamental concepts in the two models are similar: the current fiscal illusions in the student loan accounting treatment are reduced by recording as upfront spending an estimate of the write-offs associated with the loans issued that year. At the same time, the interest accruing against loan balances is only recorded as income if it is expected to be repaid. Thus the spending on loans increases in the year they are issued and the income being generated from all extant loans is reduced. Spending goes up and income comes down leading to a large change in Public Sector Net Borrowing Requirement – the “deficit”.

Previously the OBR had estimated the impact on the deficit of implementing this new treatment at £12billion in 2018/19, rising to £17bn by 2023/24.  Their new – albeit provisional – estimate is that £10billion would be added this year and £14bn in 2023/24. That said, “this estimate is subject to considerable uncertainty”. Currently, the deficit is estimated to be £22.8bn this year and £13.5bn in 2023/24. In both cases, the key target measure is moved adversely and significantly; it is more than doubled in the later year.

OBR are also to be commended for giving attention to the problem of revising estimates. Estimates of write-offs depend on forecasts of repayments and the economic variables baked into the income contingent repayment scheme. What should be done when these vary from original estimates?

Read more…