As concern about an unsustainable student finance system is growing quickly along with how universities are conducting themselves and delivering value to students, Ian Wells, PASD (Parents Against Student Debt) supporter, challenges some core myths in a series of five articles
Asked on the BBC’s Andrew Marr Show how much meeting Labour’s pledge to pay off student loans would cost, Angela Rayner, Shadow Education Secretary, said the cost of writing off all student debt is £100bn. Wrong! This is in fact the size of the total loan book and much higher than the cost of writing off all student loans. This figure is a stab at what it would cost in balance sheet terms – or what would need to be added to the National Debt to write off all loans. Of course the loan book is not worth £100bn firstly because not all of it will be repaid – 45% is not expected to be repaid and three-quarters of graduates will never pay off all their loans – and secondly because those loan repayments stretch up to 30 years into the future and need to be discounted to their present value in today’s terms and for their uncertainty.
The true test of what the student loan book is worth – and therefore what it would really cost to write it off – will come when the government tries to sell it, as it plans to do. The sale in 2013 of a tranche of student loans taken out between 1990 and 1998 with a face value of £890m was bought by Erudio, a debt collector consortium, for £160m in a competitive bidding process. They paid just 18% of face value. If the same were to happen to the current loan book of around £100bn the sale would yield just £18bn, almost enough to pay off the University Superannuation Scheme deficit of £17.5bn as at March 2017 (not that we are suggesting it!). For further comparison the latest estimate for Hinkley Point power station stands at £19.6bn and the UK National debt at £1,900 bn.
Whilst the UK student loan book will be worth more because the previous sale was of poor performing loans all the indications are that the sell-off, when it comes, will be at a low price for a number of reasons (read Andrew McGettigan’s HEPI pamphlet, “The accounting and budgeting of student loans”, for a fuller explanation):
- The Auditor General habitually adds a big disclaimer to the future value of student loans in the annual financial report: “given the long term nature for the recovery of loans and the number and volatility of the assumptions underpinning their valuation, a considerable degree of uncertainty remains over the recoverable amounts of the loans issued. Significant changes to the valuation could occur…” The government is more than ready to trade this future uncertainty for a low but certain price now – just as with the PFI initiatives that have turned out to be such poor value for the taxpayer.
- This is despite the fact that the government is in the best position to borrow cheaply to service the debt – buyers will all be paying higher interest rates on their investment and, looking for a profit, will want to pay significantly less than the value of future cash flows
- The tail often wags the dog in government accounting. A collection of arcane public sector accounting practices overvalues the cost of student loans, undervalues the asset of the student loan book and then undervalues it even further by using an extra-high discount rate of RPI plus 3.5% (the so-called social time preference discount rate) when it comes to selling decisions – so willingness to accept a low price increases.
- Add this to the fact that the DoE suffers a cut in its spending limits every time the dreaded RAB charge for impairments (reduction in the value of the loan book) is more than planned and there is every incentive to get the loan off the government’s books. It was this tangle of accounting practices that really drove the decision to freeze the earnings threshold at which debt is repaid at £21,000 as the easiest and fasted way of reducing the RAB impairment charge (by increasing the value of the loan book).
- Furthermore the value of the student loan book can’t be included as a “credit” in the National Debt because it is not a liquid asset so the National Debt goes down when the loan is sold off and the IMF and bond buyers all think the UK is doing better – when all the country has done in reality is a bad deal.
- And finally the company buying the loan book knows all this.
The end result is that the government is planning to be selling a student loan book for a low price at very poor value (to the taxpayer) that millions of graduates will then spend 30 years of their lives paying off so a private company can turn a profit. Crucially, graduates will be locked into a system for 30 years that the government will be powerless to change.
Tail wagging the dog
We think it is high time the public sector accounting tail stopped wagging so that some sensible decisions can be made on the real cost of student debt. According to Matthew Hilton, a former senior BIS civil servant, the government could reduce the RAB charge to whatever it wanted at a stroke, and within the existing overall policy framework, just by adopting a different approach to the financial management of the student loan book. Politicians: please don’t screw it up. Why don’t they change their approach so that daft accounting practices stop making our young people poorer?
And in the meantime let’s recognise that selling off student debt will harm all taxpayers, not just graduates – except for those who have shares in the debt collection agency that lands the deal.