Student Loans Contents

Conclusions and recommendations

Public finances and the design of the system

1.Due to the National Accounts accounting rules, there is no impact on the deficit when student loans are issued. As such, shifting the vast majority of all higher education spending into loans that are written off in 30 years has shifted nearly all higher education spending out of the deficit. Policy decisions taken today will have no impact on the public finances for the next 30 years. Based on the current RAB charge, £6–7 billion of annual write-offs are missing from the deficit. This figure is approximately equivalent to excluding the entire NHS capital budget from the deficit. (Paragraph 27)

2.The National Accounts accounting rules stipulate that if student loans are sold off at a loss before they are written off after 30 years, there is no impact on the deficit whatsoever. The policy of selling off student loans prior to their write-off allows the Government to spend billions of pounds of public money without any negative impact on its deficit target at all, creating a huge incentive for the Government to finance higher education through loans that can be sold off. (Paragraph 28)

3.The Government concluded its first sale of income contingent student loans in December 2017, when it sold £3.5 billion of loans, writing off £1.8 billion (51 per cent) of those loans in the process. The Government plans to sell off £12 billion of loans over the next five years. If the rate of losses on these sales is maintained, billions of pounds of student loan losses will be crystallised without having any impact on the deficit. Its inclusion would increase the deficit as forecast by the Office for Budget Responsibility (OBR) by 13 per cent, from £45.5 billion to £51 billion. (Paragraph 29)

4.Political control over increasing Government expenditure is exerted through analysis of Public Sector Net Borrowing (the deficit) which the Government sets as its fiscal target. The OBR assesses whether the Government will meet this target and subsequently the majority of political debate on public spending is focused on it. As the writing off of student loans will have no impact on the deficit for the next 30 years, the large and increasing level of money spent on higher education makes no difference to whether the Government is meeting its target, and therefore escapes scrutiny. There is no effective control over the increasing fiscal cost of the student loan regime. Better oversight could be achieved through linking the Government’s fiscal borrowing target to the Public Sector Net Cash Requirement, (how much money the Government actually needs to borrow). (Paragraph 30)

5.The Government is not responsible for the international accounting rules that allow the fiscal illusions within student loans to exist. However, the National Accounts accounting rules regarding financial transactions were not intended to be used for loans that, as the Government readily promotes, are designed to not be paid back in full. Loans that are intended to be written off are, in substance, a partially repayable grant rather than a loan. The ONS should re-examine its classification of student loans as financial assets—which they are in legal form—and consider whether a portion of the loan should, in substance, be classed as a grant. (Paragraph 31)

6.The Resource Accounting and Budgeting (RAB) charge is one of the most important numbers in the student loan debate. It presents, as a single figure, how much student debt the Government expects it will have to write off. Despite this, the 2016–17 Department for Education Annual report and accounts did not specify the RAB charge. The Committee recommends that it should be published prominently in the Department for Education’s Annual report and accounts, and should be publicly updated alongside any changes to the student loan repayment framework. (Paragraph 32)

7.The Government is better able to manage an exposure to macroeconomic risks—such as low overall wage growth and low rates of employment—than the private sector. As a result, private sector investors require a large risk margin when taking on student loan assets from Government. The risk margin on the first student loans sale was, in aggregate, 51 per cent of the sale price. (Paragraph 39)

8.Exchanging student loans for cash does not improve the Government’s financial position, it merely exchanges one asset for another. Despite this, the sale does reduce Public Sector Net Debt. Such a fiscal illusion does little to improve the Government’s financial position and may in fact cost the taxpayer money. (Paragraph 40)

9.Such a high risk margin—and the fact that selling off the loans does not improve the Government’s fiscal position—suggests the Government may be better off keeping student loans on its own balance sheet, rather than shifting the risks to the private sector and paying a large premium for doing so. (Paragraph 41)

10.Whether the sale of student loans passes the Treasury’s value for money test is heavily dependent on the discount rate used to calculate the future value of student loan repayments. As with all discount rates, there is a large margin for error. The Government has chosen a different discount rate for the purposes of the sale—a rate which places a lower value on the future repayments of the loans—than that which is used in the Department for Education Accounts. As part of its major review, the Government should consider using the same discount rate as that used in the Department for Education Accounts, as audited by the National Audit Office. (Paragraph 42)

11.It is undisputed that writing off a significant proportion of student loan debt is a deliberate design feature of the student loan system, making a student loan unlike any other form of loan or debt. In the absence of an effective explanation of the student loan framework—including the terms and conditions students are accepting—it is inevitable that the public will see write-offs as emblematic of a failing system. The criticism of retrospective changes which increase the burden on graduates as “unfair”, levelled by MoneySavingExpert and the National Union of Students, is justified. The Government should cease this practice. (Paragraph 49)

12.The then Universities Minister Jo Johnson stated that the higher education funding system “is delivering [its] core policy objectives”, one of which is to “fairly share costs between the general taxpayer and the individual student”. The fairness of the funding split is subjective; the Government should instead aim to achieve a split that is economically optimal. It is not clear how large a range of funding splits the Government would consider optimal, given that the split has swung by 10–12 percentage points since the new repayment threshold has been introduced. The Government should define what it considers to be an optimal split to give greater certainty for future public spending. (Paragraph 50)

13.The Committee welcomes the Government’s planned major review of student financing and university funding. It is, however, regrettable that Jo Johnson effectively ruled out “radical change to the core architecture [of the student loan system]” in his oral evidence. The Committee hopes that Sam Gyimah, the new Minister for Higher Education, will approach the review with an open mind. The review must be objective, widely framed, and empowered to bring about any changes deemed necessary, be they radical or otherwise. (Paragraph 51)

14.In his evidence to the Committee, Lord Willetts argued for a five-year review in which the parameters of the student loan system are openly considered. There is merit in this proposal—which the Committee assumes would mean changes are made only after such reviews—not least for greater transparency. As part of its major review, the Government should analyse the benefits and drawbacks associated with introducing a pre-defined periodic review of student loan terms, and should ensure it takes account of the thoughts of students when considering the merit of this proposal. (Paragraph 52)

15.The Committee sees no justification for using RPI to calculate student loan interest rates. RPI is no longer a National Statistic and has been widely discredited. In its Autumn Budget the Government acknowledged that the use of RPI was unfair for business rates, and the Committee is unconvinced by the case put forward for its use by the then Minister, in line with the Committee’s report on the Autumn Budget. The Government should abandon the use of RPI in favour of CPI to calculate student loan interest rates. (Paragraph 64)

16.The Committee recognises the importance of preventing student loans being taken out to be invested, and it is right that the interest rate should seek to prevent this. However, given that tuition fee loans—which make up significantly more than half of an average student’s stock of debt on graduation—are paid by the Student Loans Company directly to the university, there is little justification for applying high interest rates to the tuition fee element of student loans while students are studying. Applying an interest rate above the level of inflation to tuition fee loans whilst the student is still at university is perceived to be a punitive measure and should be reconsidered. (Paragraph 65)

17.The Government has justified the existing level and structure of interest rates on student loans on the grounds that it is progressive. In reality, the student loan system has complex redistributive effects that are not strictly progressive. High-flying lawyers will generally pay less than teachers; but both will pay more than a graduate who does not receive a pay premium from their time in higher education. As part of its major review, the Government should re-examine the repayment system to address this anomaly so that the highest earning graduates are those that make the highest contribution . (Paragraph 66)

18.The Committee is therefore unconvinced that the interest rates currently charged on student loans can be justified on redistributive grounds. Nor has any other persuasive explanation been provided for why student loan interest rates should exceed those prevailing in the market, the Government’s own cost of borrowing, and the rate of inflation. (Paragraph 67)

19.It is incumbent on the Government to ensure that the student loan system is well explained so that prospective students and their families are able to make well informed decisions. The Government must take steps to ensure that the student loan system—and particularly the interest rate—is well explained to those that it affects. (Paragraph 68)

Is there a market in higher education?

20.In implementing the 2012 reforms, contrary to the recommendations of the Browne Review, the then Coalition Government chose to introduce a cap on tuition fees. The evidence provided to the Committee suggests this was done in the knowledge that it would create a market with no meaningful price competition. Whether price competition in the higher education sector could ever be a realistic, or desirable, prospect—even without a tuition fee cap—is debatable; the incentives for students to choose courses that command smaller tuition fees are weak. (Paragraph 79)

21.Nevertheless, the Coalition Government’s expectation in advance of the 2012 reforms was that competition from new market entrants—combined with additional obligations for those universities choosing to charge above £6,000—would lead to prevailing tuition fees of around £7,500. It is overwhelmingly clear that this was a naïve assumption. Given that fees are almost universally well in excess of the level the Government intended when introducing the new fee regime, the Government should explain, and explore in its expected review, why the higher rate of fees being charged is desirable. In England, the consequences of reducing the maximum tuition fee to £7,500 or £6,000, as some have advocated, would be that the highest earning graduates pay less, and the level of funding for universities would be reduced, without either a significant increase in subsidy from the taxpayer or, more likely, the reintroduction of caps on student numbers. (Paragraph 80)

22.The current structure of the higher education market creates financial incentives for universities to recruit more students, yet the NAO has found that market incentives to achieve such expansion by improving course quality are weak. It is wrong to assume that the competition to recruit more students will be played out through competing on the basis of quality. If pursued recklessly, the aim of attracting ever greater student numbers can be damaging. The fact that university spending on marketing is increasing shows that universities can compete in ways that do not deliver any educational improvements. The market mechanisms the Government has applied to the sector are not, in and of themselves, sufficient to drive meaningful improvements in quality. (Paragraph 84)

23.If the Government is committed to creating a higher education market that functions effectively, it must take steps to improve both the quality and dissemination of information. Without adequate information, an efficiently functioning market will struggle to develop. Prospective students face the unenviable task of determining whether to participate in higher education based on increasing quantities of university marketing material coupled with a lack of proven, reliable metrics for judging the quality of courses. It is vitally important that students are able to make informed choices about what and where to study. Such decisions are typically taken at a relatively young age, yet they carry significant long-term implications. (Paragraph 88)

24.The Committee notes that the Office for Students will be tasked with developing the Teaching Excellence Framework further by taking it to subject level. This is a sensible step, but the Committee fears the Government’s efforts may be wasted if it fails to address the fact that so few students are currently making use of information that is already available. (Paragraph 89)

University finances

25.Against a backdrop of sustained reductions in public spending, the 2012 reforms saw university funding increase significantly. The sector was spared austerity. The provision of extra resource to universities sought to bring funding up to an appropriate, sustainable level that could ensure the delivery of high quality teaching outcomes. The country’s universities are an asset, and are rightly admired internationally; a point that is often forgotten in public discourse. (Paragraph 98)

26.The Committee heard that universities are not awash with cash, rather, they are now being funded sustainably, with teaching now typically breaking even. This position must be maintained to ensure that we defend the UK’s world-class higher education system. (Paragraph 99)

Issues for students

27.It is clear that the student loan system is complex, and has become even more so as a result of piecemeal changes to student loan terms. In conducting its major review of university funding and student financing, the Government must be mindful of the risk that additional changes lead only to more confusion. The Government should take this opportunity to simplify the system and significantly improve how it is explained. Prospective students must be able to easily comprehend the system, given the long-lasting financial implications of accessing student finance. It is the Government’s responsibility to ensure that a good understanding of the system is commonplace. (Paragraph 108)

28.Student loan debt is only repaid when earnings surpass a given threshold and is written off after a defined number of years. It should not be thought of as akin to typical debt. In using the terms “loan” and “debt”, the Government has made it all too easy for students and their families to think of it in this way. It is easy to imagine how the thought of accruing tens of thousands of pounds in so-called “debt” could serve as a deterrent for young people considering applying to university, and the Committee is concerned by the thought of prospective students choosing not to enter higher education due to misperceptions about the nature of student loan debt. Loan statements sent by the Student Loans Company are likely to have reinforced this troubling misconception, and must be improved to better convey the true nature of student loan repayments. (Paragraph 109)

29.The Committee welcomed the former Universities Minister’s admission that alternative language would be preferable. The Government should introduce new language that better reflects the workings of the student finance system. (Paragraph 110)

30.Maintenance loans are equally, if not more, difficult than tuition fees for prospective students to understand. The Government sends mixed messages; former Universities Minister Jo Johnson told the Committee that maintenance loans are not intended to cover a student’s living costs in their entirety, but that the Government is not being prescriptive about an expected parental contribution. This may mean that some students who lack access to additional sources of income are priced out of a university education. This is clearly at odds with the Government’s stated aim of removing barriers to access—the Government should consider how to address this as part of its major review. (Paragraph 118)

31.The former Minister’s assertion that the Government does not assume parents will contribute to living costs is directly contradicted by official Student Loans Company documentation, which states that depending on their income, parents may have to contribute towards the living costs of their student children. The assumed parental contribution will undoubtedly create financial pressure for households with multiple children at university, and the Committee is unconvinced that the maintenance loan system adequately accounts for this. The fact that parents are expected to contribute to living costs must be made much more explicit. Alternatively, if the Government maintains that it does not expect a parental contribution, Student Loans Company documentation must be corrected, and the Government must explain how university is free at the point of use for students without additional sources of income. (Paragraph 119)

32.It is vital that public debate on the issue of maintenance loans is well informed. It is deeply regrettable that the Government is still yet to publish the 2014–15 Student Income and Expenditure Survey, which will clearly be highly informative in helping the public understand students’ financial circumstances. The value of the survey’s findings is no doubt diminishing with the passage of time. The Committee recommends that this information is published urgently. The need for maintenance grants to be reintroduced has also been highlighted to the Committee, and the Government should assess the case for doing so as part of its major review. (Paragraph 120)

33.The Committee agrees that the sharp decline in part-time student numbers—brought about in part by the 2012 reforms—is regrettable. It is clear that the Government failed to anticipate the impact the 2012 reforms would have on part-time students. The Government’s major review of student financing and university funding should include a fundamental rethink of its offer to part-time students. It should ensure that part-time study is a credible option as part of lifelong learning and retraining, and that it provides access to higher education for those who are unable to study full-time. (Paragraph 122)

34.The Committee recognises the complexities associated with the task of introducing Sharia compliant loans. The Department for Education should make use of Islamic Finance expertise both within Government and externally to ensure an alternative student finance model is introduced as soon as possible. (Paragraph 124)

35.It is concerning that the Student Loans Company’s inability to make use of readily available data is leading thousands of graduates to overpay their student loans. The Committee notes the Government’s commitment to tackling this problem in the 2017 Autumn Budget, but questions whether the April 2019 deadline for completing this work is ambitious enough. HMRC told the Committee that it could perform the administration of student loans, though it would need additional capacity in order to do so. The Government’s major review should consider the case for transferring responsibility for the administration of student loans to HMRC, along with a commensurate increase in resource. (Paragraph 126)

15 February 2018