Sky News is reporting that the government is planning to announce the sale of the remaining ‘mortgage-style’ loans issued to help with costs of living to those who started before 1998. Those loans have a face value of £900million but the government will be lucky to get £300m from the debt collection agency that might be willing to put up funds.
Previous sales of tranches of those loans raised £2billion, but the government committed to offering the purchasers an annual subsidy to compensate for deferral of payment and low bank base rates until 2028. Unfortunately, they used LIBOR in the contract and still have a liability on their accounts of £250m (reflecting the value of the associated cashflows in present value terms).
A sale will lose money and only offset the bad deal entered in to last time. The key question is not the headline price pocketed by the government but that price netted against an income stream lost and any subsidy to the purchaser.
(Update, I see ‘people close to the situation’ said: ‘The low recovery rate on the 1990s loans means the sale price is likely to be only in the tens of millions of pounds, reflecting the distressed nature of the debts’. Well done, BIS!)
Here ‘s an extract from The Great University Gamble which explains what happened last time:
In the late 1990s, in the early days of the Blair government, two
£1 billion tranches of ‘mortgage-style’ student loans were sold to third parties: Finance for Higher Education Limited, a subsidiary of NatWest, and Honours Trustee Limited, a consortium formed by Nationwide Building Society and Deutsche Bank AG. These loans were for maintenance costs only and had a fixed repayment period of five years once the very generous earnings threshold was crossed. Importantly, this made repayments more predictable than for ICR loans.Although the full details of the sale are not public, announcements in the House of Commons at the time mean that we know that the government committed to paying an annual subsidy to the purchaser. These subsidies were expected to exceed the costs of keeping the loans on the government’s balance sheet by roughly £140 million.
That is, the government received £2 billion from the purchasers but agreed in return to pay annual subsidies that were estimated to amount to £750 million over the lifetime of the loans. Initially, about £120 million went out in the first annual subsidy but these payments diminished as the loans were repaid. In 2007, a written parliamentary answer estimated the repayments to amount to £635 million in 1998/99 terms. This was lower than originally estimated but at that stage the government had also revised down its discount rate from 6.0 per cent to 3.5 per cent. The cost was therefore revised to £125 million at that stage. …There are a few points to pull out of this. First, the spending plans and Brown’s two rules, one Golden, were framed around headline public sector finance statistics, as the then Chancellor tried to create an approach to economic policy that was ‘open and accountable, based on clearly established rules and discipline’. Tight departmental controls for the first two years of the New Labour administration meant that the income generated from the sales helped Brown meet his ‘Golden Rule’: that income and expenditure should balance over the economic cycle.
At the time, student loans were treated very differently in the accounts: annual loan outlay was entirely classed as expenditure and graduate repayments as receipts. With the bulk of those receipts somewhere in the future, one could see the attraction of taking £2billion upfront, and thereby alleviating the short-term restraints, in return for an ongoing annual payment. The resonance with Public Finance Initiatives (PFI) also points to the rationale: the risk of loan default is translated into an annual fee which is more predictable.
Similarly, Brown’s ‘sustainable investment’ rule meant that PSND should not rise above 40 per cent of GDP. Even under different accounting conventions today, one could still see an incentive to take the borrowing used to fund the SLC (the liability) off the balance sheet, particularly as the asset, the loan book, is illiquid and therefore does not feature in the calculation around which an ‘open and accountable’ policy has been constructed.
The present government has committed to a political narrative of deficit reduction and a slowdown in the growth of PSND relative to GDP. Since loans add so much to borrowing in the short and medium term, finding a way to shift that debt off the balance sheet makes sense politically even if it is arguably economically illiterate.
Update
I’ve just realised that the second paragraph of the book extract is garbled. This following would be better
Although the full details of the sale are not public, announcements in the House of Commons at the time mean that we know that the government committed to paying an annual subsidy to the purchaser. These subsidies were expected to reduce the value of the deal so much that when compared to keeping the loans on its balance sheet, the government expected a long-run loss of roughly £140 million in present value terms.
Higher than anticipated tuition fee loan outlay coupled with rampant over-recruitment at alternative providers has left Business, Innovation and Skills with a budgetary crisis. Estimated losses on student loans must be covered by departmental expenditure – the so-called ‘resource accounting and budgeting’ (RAB) charge.
It must find £900m of savings by 2015/16 – the first £600m of that in the financial year starting this coming April. Willetts’s proposals for where the cuts should fall are detailed in the Guardian.
Here, I will deal with a more technical question. How can the RAB charge wreak such havoc when it is a ‘non-cash’ accounting transaction (even an accounting trick in some people’s eyes)? How does it affect the kind of cash spending from where savings are now needed?
Most recent policy analysis has concerned itself with ‘cash in, cash out’ analysis which is essential for estimating the likely repayment and non-repayment on student loans with 30-year-plus lifetimes. It is also what matters when calculating the impact of student loans on the national accounts and the headline statistics of the ‘debt’ and the ‘deficit’.
However, the current crisis has occurred at a different accounting level – departmental budgets. These are not organised on a ‘cash in, cash out’ basis but use an accruals convention. This means that liabilities – here estimated non-repayment – must be recorded at the point at which the decision is taken to take them on: the time of commitment, not the time their associated payments occur.
The RAB charge is a ‘non-cash’ impairment that reflects the present value of future cash flows insofar as those cashflows are thought to be below the face value of the loans issued.
BIS were given a budget that included an element in expenditure to cover the RAB charge, but this is now taken to be insufficient – because loan outlay has been higher than expected and the economy is performing poorly so that those graduating in 2015 are likely to be making lower repayments than originally modelled.
In order to make up the consequent, in-year expenditure shortfall, the Treasury has insisted that ‘resource’ be taken from elsewhere in the departmental budget. It is no longer prepared to continue issuing the additional reserves that BIS has claimed over the last 3 years, roughly £7billion, to cover the effect of low bank base rates and changes already made to the original modelling assumptions in 2010/11.
Although there are several dimensions to this story, in accounting terms, it was RAB what done it.
I’ll be speaking at the University of Manchester on the evening of Wednesday 27 November.
Time: 6pm to 7.30pm
Venue: Samuel Alexander Building
All Welcome. More details here.
The department for Business, Innovation and Skills has released a statement in relation to the Guardian story on public funding of students at private providers, or ‘APs’ – ‘alternative providers’.
As the higher education sector has diversified, the number of applications for student support at APs has increased. In addition, the tuition fee changes implemented in 2012/13 mean students at APs may borrow up to £6,000 a year to cover the costs of their tuition. The number of English and EU students claiming support at APs has grown from 13,000 in 2011/12 to 30,000 in 2012/13, and the total public expenditure on these students has risen from £60m to £175m. This is 4% of the total student support budget. Growth has been particularly concentrated among students studying for Higher National Certificates (HNCs) and the Higher National Diplomas (HNDs).
Note that public expenditure differs from ‘outlay’. The latter would be maintenance grants plus loans for tuition fees and loans for maintenance. Expenditure is instead: grants plus the estimated non-repayment on loans issued.
That is significant as it may mean the outlay on loans and grants to those 30 000 students is over £300m in total. We should have full figures on 28 November.
What is interesting though is that figure of £60m expenditure in 2011/12. That suggests that the government is expecting less money back from graduates of private providers than from established universities.
In 2011/12, the breakdown of total private student support was:
- £30.8m in tuition fee loans
- £48.9m in maintenance loans
- £22.6m in maintenance grants
That £60m figure equals £22.6m (grants) plus the estimated non-repayment on the £79m of loans.
A quick and dirty calculation suggests £37.4m of ‘RAB’ expenditure ( £60m minus £22.6m) and therefore a non-repayment of 47%!
That is, the government only expects to receive 53p in the pound for loans made to those students. Can this be true?
That would equate to more per student public subsidy to commercial operations since the official estimate for loans to students of established universities is that 65p in the pound will be repaid.
Update – 21 November 2013
My quick and dirty calculation above turns out to be incorrect, because I was relying on the data provided to me by the Student Loans Company in November last year. It turns out the figures for student support at private providers for 2011/12 were amended in September this year.
In 2010/11, they now think £30m of grants were made, not £22.8m, and £90m of loans, not £80m. So they have a ‘RAB’ of circa £30m (33.3%).
That amendment might give you a flavour of what the National Audit Office report into the SLC will reveal next week.
Incidentally, that total outlay for 2012/13 looks like being over £300m. But we’ll probably still be revisiting that in 2014.
The Guardian’s revelations this evening underscore why I called my book The Great University Gamble.
The government exploited the existing ‘designation’ process to allow students at over one hundred private higher education providers to access student support on terms equivalent to those enjoyed by students at established universities, with the exception that since 2012/13 those students have been only able to borrow up to £6 000 per year towards tuition fees (up from £3 375 in 2011/12).
Because of that near doubling in fee loans and the government’s encouragement of ‘alternative providers’, I expected the continued expansion of the private student support budget (which also includes maintenance grants). In 2009/10, it was roughly £30m, the following year £40m, then in 2011/12, on the back of the government’s revisions to policy, the budget increased to £100m.
I thought £200m was likely for 2012/13 – with official figures for that year expected on 28 November from the Student Loan Company.
The Guardian has revealed that the 2012/13 figure was not just in excess of £200m, but £80m over budget. With 30 000 students registered that year for the HNC and HND qualifications offered by Pearson-Edexcel through private colleges (the equivalent of one or two years of undergraduate study), that represents an 150 per cent increase in such students on the previous year. Government surveys estimate that 40 000 have enrolled for those courses this year.
So concerned is the department for Business, Innovation and Skills that it has written to 23 designated private provider asking for restraint in recruitment for 2014. It is hoping to focus funding back towards ‘degree level qualifications’.
It has no other obvious path to control recruitment and runaway financial outlay. Unlike established universities, who agree a financial memorandum with the Higher Education Funding Council for England (and as a result agree to core numbers controls), designated private providers are independent and will not be subject to any numbers controls until 2014/15 (the year after this current admissions cycle). Many colleges are clearly expanding in advance of those constraints.
Private providers can currently recruit how they like and, once designated, their Home and EU students have the right to access the publicly backed student loans (EU students can apply for tuition fee loans only). ‘De-designation’ has only previously been used after evidence of fraud and student complaints. There is no agreed process and proposals are currently ‘out’ to sector consultation.
Why does this matter?
The loan scheme is subsidised – only 65p in the pound is expected back. Public money is therefore involved.
Many private HE providers are commercial, for-profit operations – some like, Greenwich School of Management or University of Law are owned by private equity – so public money subsidises private fees and potentially profits. Some of the ‘alternative providers’ are charities but they are not in the majority. The projections show annual support to these students heading towards £1bn in the next few years. As we saw in the USA, the private sector expands rapidly when backed by public money. Where will this money end up?
Further, we have no understanding of the performance of graduates from private institutions – they may end up paying back much less and so be subsidised to a greater degree. Not only are numbers at private providers uncontrolled, but you should be asking questions about the quality at many: BIS was turning around applications in 3-4 days back in 2011/12 on the basis of paperwork only; private colleges teach towards the Pearson qualification.
It also transpires that in order to introduce some control to the budget, the public teaching budget will have to be reduced by £20m – this is likely to come out of the budgets of widening participation initiatives. And £25m goes from the Access to Learning hardship fund. That is, students at established universities will suffer as a result.
If you thought this was only about higher tuition fees, you had it dead wrong. The government aimed to roll out cheap, mass provision to undercut established higher education provision. Is this then a success? In one sense, but clearly mismanaged. According to the Guardian:
a BIS spokesperson said: “Planned recruitment at some [private] providers was unaffordable.”
One insider added: “We’re only realising now the size the blank cheque we’ve written to private providers.”
For more background see Chapter 7 of The Great University Gamble and pages 98-102 in particular.
I will be giving two talks at Royal Holloway on Wednesday 20 November.
The first in the afternoon will be leading a roundtable discussion on the proposed sale of student loans. I hope to be able to reveal some new findings.
Time: 3.30pm
Venue: Rialto, Student’s Union
And, in the evening, I will be talking about university governance at an event jointly organised by UCU and CDBU.
Time: 5.30pm
Venue: Arts Building, Lecture Theatre 1
I will be speaking alongside Bristol’s pro-vice-chancellor for Education, Judith Squires, at the university’s Inside Arts Festival on Monday 11 November.
“The future of arts and humanities in a marketised educational environment”
Time: 1pm
Venue: Reception Room, Wills Memorial Building, Queen’s Road, BS8 1RJ
Details on booking a place here
And I will be available to sign books at the end!
This Saturday’s Guardian featured a long article on New College of the Humanities.
It provided some information to supplement the recent analysis of the relevant accounts on here.
It suggests investment amounts to £9million ‘or so’ – I’d assessed it at £10m.
Recruitment for 2013/14 entry came to 65 students, raising the number of students to 121. I suspect this means that the confidence expressed in the accounts was misplaced:
“The directors are confident that the envisaged student intake in the financial year 2013 will more than cover the operating costs of the college and result in a profit being realised in the 2013 financial year.”
The Guardian expressed the same reservation: ‘there is no prospect of imminent profit’. Technically, as a non-profit distributing entity, the teaching college can only make surpluses which it must reinvest. Money moves out the college through the various fees it pays to its for-profit parent, Tertiary Education Services limited. It is the parent which has raised the initial investment sums.
From the comments underneath the Guardian article, NCH students seem unaware that international and home students pay much, much less for the University of London degree that they will aim for.
Here are the details on Philosophy. That will set you back £460 per course. Once other fees are factored in, a whole BA comes to £4 177. A cool £50 000 less than three years of £18 000 (though it seems that only a minority of NCH students are paying the full whack upfront).
What is perhaps more interesting is that, if NCH wants to achieve university status, it will have to change its current degree arrangements and partner up with another university so that it can have its own courses validated. That will lead to certain presentational issues as the University of London umbrella has helped NCH so far. Grayling mentions ‘tooth-sucking civil servants’. I imagine they are responding to the suggestion that NCH could jump straight to its own degree awarding powers without building up a track record as the junior partner of an established university.
Christopher Newfield has reviewed The Great University Gamble for the LA Review of Books. It’s a great complement to the Collini Review in the LRB.
Newfield’s own Unmaking the Public University was one of the texts that inspired to work on HE privatisation when I read it in 2011.
As past, of Birmingham UCU’s ‘Week of Activities’, I will be speaking about The Great University Gamble at lunchtime on Wednesday 30 October.
Venue: Arts Lecture Room 7 (Room 223)
Time: 1.15-3pm
My talk follows a branch meeting.
Critical Education 