Well, the name seems to mislead people into thinking that the provider of student finance is a private institution, potentially making profit out of students, when it is in fact publicly owned.
There are 20 shares in the SLC: 17 are owned by the Department for Education (which has responsibility for English-domiciled students) and another three, each of those owned by one of the devolved administrations.
When you want to see what’s going on with student loans you look at government accounts: national, departmental or those of devolved administrations.
OK. So what’s the point of mentioning this factoid?
I believe that the misunderstanding about the publicly-owned nature of the SLC contributes to thinking that leads to other confusions, such as those surrounding function of the interest rate in student loans and what the effect of reducing them would be.
Let’s leave aside the misunderstandings about the recent ONS accounting changes and concentrate on the claim that reducing interest rates would “address the size of the debt owed itself”.
The government is looking to reduce public debt, but lowering interest rates would only do this in the long-run, if the loan balances eventually written off were written off by making a payment to a private company to clear those balances.
There is probably another confusion here regarding the Janus-faced nature of student debt: it is an asset for government (it is owed to government) and a liability for borrowers. The outstanding balances on borrowers’ accounts are not the same as the associated government debt.
When the government thinks about public debt in relation to student loans, it is thinking about the borrowing it had to take on in order to create the student loans.
Imagine that I borrow £10 in the bond markets to lend you £10 for your studies: I have a debt to the markets and an asset, what you owe me. The interest on the former and the latter are not the same and the terms of repayment on the latter are income-contingent so I don’t expect to get sufficient repayments back from you to cover my debt to the markets.
Student loans are not self-sustaining. It requires a public subsidy – any announcements about loans in the spending review at the end of the month will be about how much subsidy the government is prepared to offer.
Economic & Fiscal Outlook, Office for Budgetary Responsibility (March 2021), adapted from Tables 3.14 & 3.26
I have constructed the table above from forecasts for Total Managed Expenditure and Financial Transactions taken from the Office for Budgetary Responsibility’s latest publication (it accompanied Wednesday’s Budget).
It shows how newly issued student loans are now split into two components for the purposes of presentation in the National Accounts. The portion of loans that are expected to be repaid are classed as “financial transactions”, while the portion expected to be written off is recorded as capital expenditure. The latter scores in “public sector investment”, which was adopted as a new fiscal target prior to the pandemic (net investment cannot exceed 3% of national income), though the rules are currently under review.
We can see that student loan outlay is expected to reach £20billion in the year to March 2021, rising to £23.6billion in five years’ time. The majority of new outlay is now expected to be written off and that share rises over the forecast period. By 2025/26 repayments on all existing loans are projected to re000000000000000ach nearly £5billion per year. (This figure has improved since the sale programme for post-2012 loans was abandoned, since the treasury now gets the receipts that would have gone to private purchasers).
As mentioned in recent posts on here, the Department for Education only currently has an allocation of £4billion to cover the capital transfer / grant element of new loans and so it has to be granted large additional budgetary supplements each year. This situation has dragged on as the planned spending review has been postponed. We can now expect developments in the Autumn.
Given the relative absence of higher education from yesterday’s Autumn Statement, I turned my attention to the Department for Education’s 2019/20 annual accounts, which were published earlier this month.
Regarding student loans, we have been in something of a hiatus since 2018, when Theresa May announced an review of post-18 funding and commissioned the Augar panel, which reported last summer. Although there were suggestions that we might get a long overdue response to the latter yesterday, we will probably have to wait now until the Budget next March, when the government will hope to have a better sense of its spending commitments.
That leaves student loan finance in limbo with the small, nominal budget allocation for loan write-offs shored up by large “Supplementary Estimates” provided by parliament each February.
This is in spite of an apparent “target RAB” of 36% and a budgeting process hanging over from 2014, when the old department for Business, Innovation and Skills (BIS) had responsibility for loans and was being “incentivised” to reduce the cost of the loan scheme. You can see both of these features still stipulated in the latest Consolidated Budgeting Guidance, but they represent zombie policy with little to no bearing on events.
Why so? Well, DfE was given an extra £12billionplus back in February to supplement 2019/20’s budget for “non-cash RDEL” (mostly student loan “impairments”) of £4.7billion per year. (Student loans are “impaired” because the loans are worth less in estimated repayments than the cash advanced.) The supplement produces a total that is more than triple the original allocation.
And… DfE managed to spend nearly £16billion of that last year. The accounts report an “underspend” of £1.1bn against that total.
As can be seen from the table below, “Fair Value movement” for student loans amounted to a non-cash cost of over £14billion.
£17.6billion of new loans were issued, a net increase of £15billion once repayments of over £2billion are considered, but the new impairments on post-2012 loans increased by £12.3billion; for “pre-2012” loans the stock remaining at year-end lost nearly £1.7bn when revalued.
Although the nominal value (“face value”) of outstanding post-2012 loan balances is nearly £105billion, those loans are thought to be worth less than £50bn.
The increases in impairments break down into a RAB charge and a stock charge.
The other £7billion was a write down on loans issued in previous years and is based on changes made to the model used to estimate loan repayments. Only £2.1billion of that downwards revaluation is attributable to Covid (the loans were revalued in July).
The accounts make available a further breakdown of the modelling changes.
The implications seem clear: HE is due a day of reckoning. From a financial perspective, the strongest measures would control outlay rather than boosting repayments. In cash terms, the former has immediate impact on finances, whereas the latter spreads the effect over decades and is politically difficult at this time.
Tuition fees are to be frozen again in 2021/22 and we should expect this to continue. Announcements in FE suggest that the government would also like students to switch away from longer, more expensive HE courses. More radically, I would expect the government to be reviewing the Augar suggestions of tuition fee reductions and caps on places for certain courses (Recommendation 3.7).1
“Over the medium term getting our borrowing and debt back under control. We have a sacred responsibility to future generations to leave the public finances strong, and through careful management of our economy, this Conservative government will always balance the books. If instead we argue there is no limit on what we can spend, that we can simply borrow our way out of any hole, what is the point in us?”
1 “We therefore invite the government to consider the case for encouraging the OfS to stipulate in exceptional circumstances a limit to the numbers an HEI could enrol on a specific course, or group of courses. It would be critical for the OfS to be transparent about the grounds and process for such an intervention and we can offer no more than a broad indication of what these circumstances might be. Where there is persistent evidence of poor value for students in terms of employment and earnings and for the public in terms of loan repayments, the OfS would have the regulatory authority to place a limit, for a fixed period, on the numbers eligible for financial support who could be admitted to the course. The institution in question would remain free to recruit to all other courses without restriction. Such a cap system would clearly target the institutions that are offering poor value, rather than altering the entry criteria for individual students.”
p. 102, Independent Panel Report to the Review of post-18 Education & Funding
