House of Commons - Student Loans - Business, Innovation and Skills Committee

Student Loans - Business, Innovation and Skills Committee Contents

2 PART ONE: STUDENT FUNDING POLICY, STRATEGY AND REVIEW

INTRODUCTION

6. It has been estimated that the level of student debt will increase from £46 billion in 2013 to approximately £330 billion by 2044.[6] The student loan-book will therefore become a significant macro-economic consideration within a generation. In its recent Report, the NAO made four clear recommendations to improve the strategic outlook of the Student Loans Company (SLC).[7] Our inquiry also raised concerns which caused us to scrutinise the role of the SLC.

SYSTEMATIC FACTORS

THE RAB CHARGE

7. Fundamental to the ability of the Government to accurately target, value and redeem outstanding loans, is its ability to forecast repayments into the future. The NAO reported that "BIS's projections of annual loan repayments have consistently been higher than amounts collected".[8] It went on to conclude that "reliable forecasts of repayments are required for a robust valuation of the loan book".[9]

8. The difference between the estimate of the value of future income from students and the original value of the loans is recorded as a cost in full in the year that the loans are given. This cost is also known as an 'impairment' or the 'Resource Accounting and Budgeting' (RAB) charge and provides early recognition, at a total level, of amounts that are expected never to be repaid. In other words, the RAB charge calculates the predicted subsidy that the Government implicitly pays to students through the favourable terms connected to student loans. The RAB charge is presented as a percentage, which may be interpreted as 'if the Government loaned £1 to a student today, on average what percentage of that £1 does it expect not to be repaid?'

FORECASTING IMPLICATIONS OF THE RAB CHARGE

9. The Government currently models future repayments by forecasting what proportion of loans issued will never be repaid. However, accurate forecasting of the RAB charge has been a challenge for the Government. The NAO expressed concern when it reported on this and concluded that the Department could not explain the difference between actual and forecast repayments:

The NAO estimated that this inability to accurately forecast resulted in the Department collecting £111 million less in repayments than it expected in 2011-12.[11]

10. The President of the National Union of Students, Toni Pearce, voiced the Union's concerns about this, highlighting how much the estimate of the RAB charge had changed over the past two years:

11. The Department was aware that its forecasting had not performed well. It told the NAO that it aimed "to improve forecasting by using more detailed information on borrowers' earnings to project future earnings and repayments".[13] Its current modelling does not include factors that can affect how quickly a borrower's salary will rise, such as the subject they studied or the university they attended, despite the fact that the data indicates that there is a correlation between the factors.[14] This weakness in the model has been highlighted to the Department for some time. As far back as 2010, the Higher Education Policy Institute (HEPI) reported that the Government had significantly under-estimated the RAB charge. In October 2012, HEPI published its own analysis, which produced a RAB charge of around 40 per cent (12 percentage points higher than the Department's estimate at the time). The Secretary of State, in response to that work, strongly refuted HEPI's findings:

That view was confirmed by Martin Donnelly, Permanent Secretary at BIS:

12. The Government now estimates the RAB charge to be 45 per cent, although at the time of our taking evidence it was estimated to be around 40 per cent.[17] Bahram Bekhradnia, Director of HEPI, outlined the developments in the RAB charge:

The original Government projection was 28 per cent RAB charge. It then went to 30 per cent in the White Paper. It was 32 per cent this time last year, [when the Secretary of State gave evidence] and now they are saying 35 per cent to 40 per cent. I see London Economics are saying it is close to 40 per cent as well.

13. During our inquiry into the Government's higher education reform in 2011, we drew the Minister's attention to the work of HEPI. The Minister did not accept HEPI's assessment then, stating that "no one can be certain" about the RAB charge.[19] When he appeared before us in 2014, the Minister conceded that HEPI's research appeared to be more accurate than his own but argued that HEPI had been "right, for the wrong reasons".[20] He elaborated:

14. However, in evidence to us HEPI cited projected earnings as a specific failing of the Department's model:

The estimates from the BIS model are insensitive to long term growth in average wages. This is because the projected earnings of former students and the future repayment threshold level are both increased annually in line with average earnings.

[…]

15. Bahram Bekhradnia, Director of HEPI, reinforced his organisation's analytical findings on the Department's modelling of the RAB charge when he gave evidence:

He concluded that the main reason for HEPI's greater accuracy was that the Department's assumption that future earnings growth would "be spread equally among the population" because "that has never happened in the recent past, and there is no reason to think that it will in the future".[24]

16. Toni Pearce, the President of the National Union of Students, highlighted another aspect of the Department's modelling which was open to question:

17. THE EVIDENCE THAT WE HAVE RECEIVED, BOTH IN THIS INQUIRY AND INQUIRIES, SUGGESTS THAT THERE HAS BEEN A PERSISTENT MISCALCULATION OF THE DEPARTMENT'S ESTIMATES OF THE RAB CHARGE. THE RESULTING HOLES IN THE BUDGET ARE ONLY JUST BEGINNING TO MATERIALISE. FORECASTERS, PARTICULARLY HEPI, HAD AND CONTINUE TO HAVE A MORE ACCURATE PICTURE OF REPAYMENTS. DESPITE THIS, THE DEPARTMENT HAS IGNORED THEIR CONCERNS. WE RECOMMEND THAT, AS A MATTER OF URGENCY, THE DEPARTMENT CONDUCTS A FULL REVIEW OF ALL THE FINANCIAL ASSUMPTIONS UNDERPINNING THE DEPARTMENT'S RAB MODEL.

BUDGETARY IMPLICATIONS OF THE RAB CHARGE

18. Student loans are given on "soft terms", in that they have more favourable terms and conditions attached to them than if students were to borrow the money commercially. They are, therefore, effectively subsidised.[26] This subsidy arises from two elements: the interest rate being lower than the Government's cost of borrowing capital (for pre-2012 loans) and 'policy write-offs', for example, the fact that all loans are written off after 30 years. As we mentioned earlier in this Report, the RAB charge provides early recognition, at a total level, of amounts that are expected never to be repaid. BIS has been given a ring-fenced budget within its Resource Departmental Expenditure Limit (Resource DEL) for these impairments each year, which has been set by the Treasury, based on a target level of impairments.[27] The target level of impairments is not currently published. If the assumptions made in the BIS student loan repayment model (the RAB charge) are revised, there can be further impairments of historic loans in following years. For example, in 2013-14, the Department received £6.7bn from HM Treasury to allow for additional impairments of new and existing student loans, of which £3.4bn was utilised.[28] The Treasury has therefore been keen to provide BIS with some incentives to take measures to keep these costs under control over the medium and longer term, rather than simply look to Treasury to make up the shortfall.

19. As a result, impairments to post-2012 student loans above HM Treasury's target are now charged to DEL over 30 years, spreading these costs to budgets that BIS must manage itself. The Chief Secretary to the Treasury, Danny Alexander, stated that this would "improve the incentives for managing the long-term costs of new student loans".[29] If BIS then fails to take action to revise its policies around student loans, there is a risk that impairments of the student loan book will adversely impact other, unrelated BIS budgets.

20. Annex B sets out how student loans are accounted for, and where responsibility for risk lies. Adjustments made to previously issued loans, to ensure the carrying value of these loans is not greater than the value of estimated future cash flows, is known as the stock charge.[30] The level of actual loans and repayments every year is recorded in the Annual Managed Expenditure (AME), where the budgets are not subject to a fixed annual limit and therefore the risk lies primarily with Treasury rather than the Department. The level of actual repayments only affects the Department's DEL budget in so far as it alters projections for future repayments over the long term.

21. WE SUPPORT THE CHIEF SECRETARY TO THE TREASURY'S AMBITION OF IMPROVING THE INCENTIVES FOR MANAGING THE LONG TERM COSTS OF NEW STUDENT LOANS, AND ENCOURAGE THE TREASURY TO LOOK FOR FURTHER WAYS TO STRENGTHEN THESE INCENTIVES. HOWEVER, WE ARE CONCERNED THAT THE CURRENT ARRANGEMENTS MAY HAVE AN ADVERSE IMPACT ON UNRELATED BIS BUDGETS IN THE MEDIUM TERM.

22. IN ORDER TO IMPROVE TRANSPARENCY AND ACCOUNTABILITY, WE RECOMMEND THAT THE DEPARTMENT PUBLISHES HM TREASURY'S TARGETS FOR IMPAIRMENTS FOR STUDENT LOANS ALONGSIDE REPORTS AGAINST ACTUAL PERFORMANCE.

MONITORING AND REPORTING OF THE STUDENT LOANS COMPANY AGAINST TARGETS

23. The organisations and agencies responsible for student loans are subject to a series of targets set by the Department. The NAO's Report stated that the Department set:

Adequate targets for HMRC designed to incentivise quick and accurate information processing and repayment collection through the tax system, and HMRC met all of these targets in 2012-13. These targets have become tougher since 2010-11, and HMRC has consistently met them.[31]

24. In respect of the Student Loans Company, the NAO found that:

However, the NAO concluded that, although the SLC may have met its targets, they were not fit for purpose. It is a key target for the SLC to have 98.5 per cent of borrowers in a Repayment Channel, which the Department describes as any borrower that it considers to be "either repaying on time or not earning enough to repay".[33] The NAO found that the SLC was counting a substantial number of borrowers as being in a Repayment Channel despite not having current information on either their employment status or whether or not they should be repaying. The NAO pointed out that, as a result, a large number of borrowers may have been incorrectly categorised:

25. The NAO estimated that, had the SLC classified graduates that it had no current employment information on as being outside of a Repayment Channel, its performance against such targets would be reduced from 99.1 per cent to 86.4 per cent in 2013, clearly missing its target. If fully repaid or cancelled accounts were also removed from the Repayment Channel that figure would fall to 84 per cent.TABLE 1: DESIGN OF COLLECTION PERFORMANCE TARGETS

Source: National Audit Office analysis of Student Loans Company data

The NAO concluded that "the way BIS has designed the targets means that reported performance is potentially misleading".[35]

26. FOR THE NAO TO CONCLUDE THAT THE TARGETS SET FOR THE STUDENT LOANS COMPANY BY THE DEPARTMENT MAY HAVE BEEN MISLEADING IS A DAMNING FINDING. IT IS OBVIOUS TO US THAT THE DEPARTMENT MUST ADDRESS THIS AS A MATTER OF URGENCY.

TARGETING REPAYMENTS

27. The NAO recommended that a more accurate target for the SLC would be the amount of repayment money collected in a year. This would provide greater clarity, and assist in the performance measurement of the SLC. However, such a target would be subject to factors outside of the control of the SLC. For example, borrowers do not make any repayments until they earn an income above a specified amount (currently £21,000 a year). This means that the SLC is dependent on positive macro-economic conditions (specifically, higher employment) to increase repayment amounts. If unemployment rose, repayments would fall. The NAO summarised this concern:

28. However, the NAO was clear that "BIS should publish a transparent and readily understandable forecast for the amount it expects to be collected each year and report on any variance".[37] When he came before us, David Willetts, the Minister for Universities and Science, told us that he had accepted the NAO's recommendations.[38] However, it was not clear to us whether this specific recommendation would be implemented in the near future:

29. We already have noted that this is a factor in the setting of a financial target, but we believe that the NAO was correct to state that:

30. THE NAO HAS HIGHLIGHTED UNDER-PERFORMANCE IN TERMS OF THE COLLECTION OF LOANS AND THE NEED FOR AN ANNUAL TARGET OF MONEY COLLECTED IN A YEAR TOGETHER WITH AN EXPLANATION OF ANY VARIANCE. WE SUPPORT THAT RECOMMENDATION AND LOOK TO THE DEPARTMENT TO SET CLEAR TARGETS FOR THE SLC AS A MATTER OF URGENCY AND TO PUBLISH THE EARNINGS AND COLLECTION ASSUMPTIONS BEHIND THOSE TARGETS.

CULTURAL FACTORS

31. In February 2014, the Committee of Public Accounts reported that:

32. We received similar evidence during the course of our inquiry. For example, the President of the National Union of Students expressed her concern that the taxpayer was losing out because the SLC was not collecting debts effectively:

She concluded:

GRADUATES NOW LIVING OVERSEAS

33. According to the NAO's analysis of the SLC's data, two per cent of borrowers with outstanding student loans are currently working overseas. While this is a very small percentage, it represents an outstanding debt of £400 million.[44] Approximately 25 per cent of that debt is in arrears: around 14,000 graduates living overseas are currently behind on their repayments.[45]

34. The NUS argued that the current systems used by the SLC made it hard for borrowers living overseas to repay debts and arrears:

35. When we asked the Minister how the Department would improve its collection of debts abroad, he appeared to focus on the same areas of difficulty. He confirmed that the Department was working to improve the procedures to make it easier for graduates to repay:

36. While these initiatives are all positive developments, the large amount of outstanding debt from graduates working overseas does not stem from the fact that graduates don't know how to pay, but rather that they are avoiding making payments. The NUS acknowledged this problem:

37. HEPI compared the English and Australian student loans systems and suggested that both countries consider:

converting income-contingent debt to mortgage-style debt on leaving the country;
applying a higher rate of interest or a surcharge on all those going abroad to work for a period of time; and
taking a joined-up approach with other parts of Government so that non-repayment affects other services.[49]

38. Mick Laverty, the Chief Executive of the SLC, explained to the Committee of Public Accounts how the SLC chased students who had moved abroad and did not pay:

He also said that, in some cases, the SLC would use private debt collectors.[51]

39. However, Mr Laverty acknowledged that communications from the SLC were easy to ignore and, with all loans written off after 30 years, there was little incentive for debts to be paid when they were easy to avoid.[52] Despite this, the Minister assured us that the Department was striving to incentivise debtors to begin paying again:

40. This appears to go hand in hand with a recent media campaign apparently aimed at such graduates to dissuade avoiding repayments while working abroad.[54] While it was clear that the Minister had good intentions to improve this situation, our findings suggest that more needed to be done. We have heard that in New Zealand, although student loans are usually income contingent, when borrowers move overseas they pay a flat rate based on the total outstanding loan.[55] This removes the need for the Government to collect information of the borrower's income and makes the borrower's obligations clear.

41. THE GOVERNMENT IS FINDING IT HARDER TO COLLECT FROM DEBTORS WHO HAVE MOVED ABROAD AND THE COMPLICATED STRUCTURE OF INCOME-CONTINGENT LOANS ADDS TO THAT DIFFICULTY. WE THEREFORE RECOMMEND THAT THE GOVERNMENT ASSESSES WHETHER CONVERTING INCOME-CONTINGENT DEBT TO MORTGAGE-STYLE DEBT FOR BORROWERS LEAVING THE COUNTRY WOULD AID COLLECTION OF OUTSTANDING STUDENT LOANS.

ABSENCE OF INFORMATION

42. A common thread in our inquiry and that of the Committee of Public Accounts was the lack of a solid evidence base on the data underlying the student loan-book. Specifically, the NAO reported that the Department lacked "sufficient information on whether borrowers with no current employment record are earning enough to repay their loans".[56] The NAO made three recommendations to the Department:

1. Carry out analysis to better understand the circumstances of borrowers in this category, particularly those who remain without a UK employment record for longer periods, and to assess the level of repayments that may be lost.

2. Work with other government Departments to develop a strategy for sharing data that provides opportunities to gain information on the circumstances of specific borrowers, for example those who have not had an employment record for long periods. Given the projected size of this public asset, other departments should consider how they can support BIS and the SLC.

43. Our inquiry also considered this matter. The Director of HEPI, Bahram Bekhradnia, had some sympathy for the size of the Department's task, but told us that more could be done with additional resources:

44. The lack of detailed information was also highlighted when Martin Donnelly, Permanent Secretary in the Department, Luke Edwards, Deputy Director of HMRC, and Mick Laverty, Chief Executive of the SLC, gave evidence to the Committee of Public Accounts. When questioned, they were unable to give detailed information on:

· How many people were currently making repayments[59]

· Whether or not information about fraud was shared with other departments[60]

· How much money was owed by British students abroad[61]

· How much was owed by EU-students[62]

· The names of people who owed money who are abroad[63]

· The country where the biggest outstanding debt was.[64]

45. The Committee of Public Accounts concluded that:

When he gave evidence to us, however, the Minister tried to reassure us that the Department would improve this "by collecting information promptly, keeping in touch with people who have borrowed, and being energetic in reclaiming it".[66]

46. IT IS CLEAR FROM OUR EVIDENCE AND THAT OF THE COMMITTEE OF PUBLIC ACCOUNTS THAT THE OVERALL APPROACH TO COLLECTING STUDENT DEBT LACKS RIGOUR. IT IS THE CASE THAT THE SLC IS REQUIRED TO MEET TARGETS SET BY THE DEPARTMENT AND IT IS TRUE THAT THE SLC HAS MET MOST OF THESE TARGETS. HOWEVER, WE CONCLUDE THAT THE SLC'S TARGETS ARE NOT FIT FOR PURPOSE AND NEED URGENT REVIEW.

OTHER FACTORS

INTERNATIONAL COMPARISONS

47. The box below compares features of the English student loan repayment system with those of Australia, New Zealand and the United States of America.TABLE 2: COMPARISON OF SIMILAR STUDENT-LOAN COLLECTION REGIMES

Source: Business, Innovation and Skills Committee analysis of NAO Student Loans Report and U.S. Student Loans website

48. The U.S. Department of Education uses loan servicer companies to collect student loan payments, respond to customer service inquiries and perform other administrative tasks.[67] There are 11 such companies currently administering the Direct Loan Program and the Federal Family Education Loan Program.[68] The Department monitors survey results and dozens of financial metrics, including default rates, for all loan servicing contractors.[69] These are used to assess the servicers' performance and determine the proportion of loans to allocate to each servicer.[70] The servicers have performance-based contracts so that they compete against each other for a share of the allocation of new borrowers to service. Greater performance results in a larger allocation of new borrowers and therefore more income from the Department of Education.

49. The U.S. Department of Education also contracts with 23 collection companies to try and recover defaulted loans. The allocation of defaulted loans again depends on the collectors' performance. However, there has been some criticism that "the Department has created financial incentives for its contractors that encourage high collections at the expense of borrower rights".[71]

50. IT IS REGRETTABLE THAT THE GOVERNMENT DID NOT DO MORE TO LEARN FROM EXAMPLES OF BEST PRACTICE OVERSEAS. THE GOVERNMENT SHOULD EXAMINE EXAMPLES OF GOOD PRACTICE OVERSEAS, INCLUDING IN THE UNITED STATES OF AMERICA, IN ORDER TO ASSESS WHETHER ELEMENTS COULD BE INCORPORATED INTO THE WORKING CULTURE OF THE SLC.

REMOVING THE CAP ON THE NUMBERS OF STUDENTS

51. The issues that we have highlighted in this section could be addressed satisfactorily in a contained environment, as is currently the case. The Higher Education Funding Council for England (HEFCE) explained:

52. It may be sensible to control Government spend on students, especially when the Minister said that the Government "estimate[s] that around 60 per cent of students supported under the post-2012 funding system will benefit from having some or all of their loan written off".[73] However, that control on spending is due to be abolished. In 2014-15, the number of HEFCE fundable places for students will be 264,363. Students who achieve ABB grades at A-level (or equivalent in certain other qualifications) are not included in that number control and it is assumed that approximately 119,000 students will achieve these grades and will be exempt from the student number controls.[74] In the 2013 Autumn Statement, the Chancellor of the Exchequer announced that the Government would remove the cap on student numbers at publicly-funded higher education institutions in England in 2015-16.[75] He described the cap—designed to control the level of public-funding on student loans—as "arbitrary".[76]

53. There is general support across the political spectrum for the educational, economic and social benefits of removing the cap on the number of students. Indeed, as the Chancellor stated, "each year, about 60,000 young people who have worked hard at school, got the results, want to go on learning and want to take out a loan to pay for it are prevented from doing so".[77] However, there is a cost attached to the removal of the cap. The Government subsidises students and therefore the removal of the cap eliminates any control over the level of subsidy.

54. THE ARRANGEMENTS FOR THE EFFICIENT COLLECTION OF THE STUDENT LOAN SCHEME ARE NOT WORKING AND THE CURRENT SYSTEM OF 'DEBT' AND 'REPAYMENT' IS NOT BEING MANAGED EFFECTIVELY. IT IS CLEAR THAT AN OVERHAUL OF THE SYSTEM IS NEEDED, ESPECIALLY IN LIGHT OF THE MINISTER'S ASSESSMENT THAT THE LEVEL OF STUDENT DEBT WILL INCREASE TO APPROXIMATELY £330 BILLION BY 2044.

55. THE STUDENT LOANS COMPANY SHOULD BE FAIR BUT ROBUST IN FULFILLING ITS DUTY TO ACHIEVE VALUE FOR MONEY AND MUST DEMONSTRATE A STRATEGIC SHIFT TO A MORE DYNAMIC CULTURE IN ITS DUTIES TO ACHIEVE THE BEST VALUE FOR THE TAXPAYER THROUGH THE MOST EFFICIENT COLLECTION OF REPAYMENTS. THE DEPARTMENT SHOULD ASSIST WITH THIS BY REALIGNING THE FORMAL TARGETS TO DEMONSTRATE THIS EXPECTATION AND DRIVE THROUGH A CHANGE OF CULTURE.

56. THE UNITED KINGDOM IS APPROACHING A TIPPING POINT FOR THE FINANCIAL VIABILITY OF THE STUDENT LOANS SYSTEM AND THE REMOVAL OF THE CAP ON STUDENT NUMBERS WILL PUT EVEN GREATER PRESSURE ON THE SYSTEM. THERE IS A NEED FOR AN URGENT REVIEW OF THE SUSTAINABILITY OF THE SYSTEM. WE RECOMMEND THAT, IN ITS RESPONSE TO THIS REPORT, THE GOVERNMENT MUST COME BACK WITH A CLEAR TIMESCALE FOR THIS REVIEW.