Student loan expansion relies on ‘accounting trick’

The lowering of the write-off on student loans has made it “easier” to go ahead with a major expansion of lending, but critics warn that this relies on changes that create “a loss of trust” among students.

The government’s spending review, delivered by the chancellor George Osborne on 25 November, announced a headline cut in the Department for Business, Innovation and Skills’ budget of 17 per cent, or £2.4 billion in the period to 2019-20.

The spending review also announced that maintenance loans will be extended to part-time students, that loans for master’s students will be launched for 2016-17 (with students aged up to 60 eligible, dropping earlier plans to cap eligibility at 30) and that students taking second degrees in science subjects will become eligible for fee loans.

And it revealed that the government’s estimate of the write-off on student loans, known as the resource accounting and budgeting charge, will be lowered to “around 30 per cent”.

The RAB estimate, currently at 45 per cent, has been a subject of long-running debate, with repeated increases bringing claims from critics that the loans system was unsustainable.

The lowering of the estimate is achieved by two factors. First, the spending review document confirmed that the government is pressing ahead with its controversial move to freeze the repayment threshold on loans at £21,000 until April 2021.

The move breaks the government’s original pledge that the threshold would be uprated in line with earnings. It is a retrospective change, meaning existing students and graduates who took out loans after 2012 will be forced to pay more.

Second, the discount rate – the government’s figure on how much it expects to discount future loan repayments taking into account factors such as its borrowing costs – is being lowered from 2.2 per cent above the retail prices index measure of inflation to 0.7 per cent above.

Emran Mian, director of the Social Market Foundation thinktank and formerly the lead civil servant on the Browne review, saw a link between this move and the expansion of loans to part-time, postgraduate and second-degree students.

Mr Mian said that the lowering of the RAB charge “makes it easier to have that expansion”, as the “fiscal impact” of the new loans is “significantly lower” now that the write-off estimate has been lowered.

He said of the discount rate change: “I’m glad that they’ve finally made the change. Now decisions can be made on the basis of a more accurate estimate on the long-term cost of student loans.”

But John Thompson, a higher education consultant who has written reports for the Higher Education Policy Institute, said that although freezing the repayment threshold – one factor in the lowering of the RAB charge – would improve “immediate financial sustainability”, it came “at huge cost in terms of the loss of trust” among current and potential future students.

And he noted that in a report on the summer Budget, when it was announced that the discount rate was under review, the Institute for Fiscal Studies said that any change would be “essentially an accounting ‘trick’”. The IFS said then that an adjustment “will not change the real resources going to students or universities; nor will it increase repayments from graduates. Instead, it means that future repayments will be valued more highly today.”

john.morgan@tesglobal.com

BIS spending cut ‘deeper than 17 per cent’

Cuts to the Department for Business, Innovation and Skills’ spending are arguably deeper than the headline spending review figure of 17 per cent.

BIS achieves the 17 per cent figure only once £900 million of additional apprenticeship income flowing into the department from the new apprenticeship levy, to be paid by employers, is taken into account.

There are suggestions that BIS officials have indicated privately that the cut in spending to 2019-20 is actually closer to 30 per cent.

BIS cuts worth at least £3.2 billion are identified in the Treasury’s spending review “blue book”. The savings affecting higher education are “over £2 billion” from the previously announced decision to scrap student maintenance grants and replace them with loans; £120 million from teaching grants; £165 million from Innovate UK by switching grants to loans; and £100 million from BIS administration.

On the teaching grant, the Treasury’s blue book says that funding for high-cost subjects will be “protected in real terms”. But the government will ask the Higher Education Funding Council for England to “retarget and reduce” student opportunity funding for disadvantaged and disabled students. There will also be “savings in other areas of the teaching grant”.

However, a spending review document later published by BIS goes further on student opportunity funding, saying that the intention is to “retarget and reduce by up to half”.

Given the fund is worth £380 million, this could produce a cut in the teaching grant of up £190 million.