Unnoticed by the vast majority of student borrowers, the government recently made a change to the financial methodology behind how it works out the value of the student loan book, which is likely to have very significant ramifications in the future. What happened, and what could it mean for the long term?
Between a RAB and a hard place
The change in question concerns something known as the “Resource Accounting and Budgeting” or “RAB” charge – an esoteric term that is used to describe the percentage of the government’s outstanding student debt which, according to its forecasts, won’t be repaid by graduates.
It was discovered through a recent parliamentary question that the RAB charge on the government’s balance sheet – which had previously been estimated at between 40 and 45% – has now been reduced to between 20 and 25%. In other words, the government is now saying it expects to write off only half as much debt as it did until recently.
The government’s basis for making this change in the RAB rate rests on another recent decision: to freeze the earnings threshold at which graduates have to start making repayments at £21,000 until April 2021, rather than allowing it to rise in line with inflation as they had previously said it would. This change, which is being retrospectively imposed on graduate borrowers, will see millions of graduates handing over more of their salary to repay the debts than they were told they would have to when they first signed up for them.
Commercial lenders wouldn’t be allowed to retrospectively adjust the borrowing terms of their customers’ debts like this, but the government is able to because student loans are not governed by the Consumer Credit Act 1974. Although governments have always theoretically been able to change the terms of existing student loans, most experts had previously expected that they would never use these powers because making retrospective changes would be so controversial.
However, the government has decided to go ahead with this change despite holding a public consultation exercise where the majority of respondents expressed negative views towards it. IF’s own position was that the changes were regressive – as middle-income graduates will be worse affected than higher earning ones – and imposing unexpected retrospective changes was unfair.
It’s in the government’s interests to present the RAB charge as being as low as possible as this effectively reduces the level of public subsidy being directed towards student loans, making its financial position appear stronger. In addition to changing the repayment terms, the government also lowered the discount rate – the number which is used to express the value of the future repayments it expects to receive as a lump sum today – from RPI inflation +2.2% to +0.7%.
The government’s long-term aim is to sell the student loan book to a private sector buyer, who would be paying a lump sum price now in return for the flow of future repayments they would receive from graduates. Therefore, the government needs to make this flow of repayments appear to be as valuable as possible today, even if in reality it turns out to be worth less than expected because of weak graduate earnings, for example. As Pam Tatlow, the head of the Million+ higher education think tank, said in a blog on this subject, “the funding of higher education is routinely based on smoke and mirrors accounting, and this looks to be another example.”
The bottom line is that today’s students should clearly be worried, as the government has shown that it is willing to alter the repayment terms of their student debts to make them more onerous on graduates in the future. Unfortunately, students now have every right to feel that they can no longer trust the government when it tells them that going to university represents good value for money.