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A baker’s dozen on the RAB

  • 27 March 2014
  • By Nick Hillman

There has been fervent debate about the Resource Accounting and Budgeting charge, known as the RAB charge, in recent days. I was even invited to speak about this rather technical concept on the Radio 4 Today programme last Saturday. It is all because the Government has just increased the figure to 45%.

The RAB shows the amount of money loaned to students that is expected by the Government never to be repaid, leaving taxpayers to pick up the bill. It is often confused with the proportion of former students who will never repay their full loan, but that is different (and substantially higher).

Here are 13 ‘facts’ about the RAB.

  1. Many of us in HE policy struggle with its ramifications – for example, exactly what it means for the BIS accounts, for the deficit and for the debt. The Labour HE spokesman, Liam Byrne, is presumably one of the few people working on HE policy outside government who really understands it, as he is a former Chief Secretary to the Treasury.
  2. It bounces around a lot. In recent years, it has gone from 40% to 28% to 33% to 40% to 45%. There used to be different RAB figures for maintenance loans and tuition loans but the RAB is no longer published in that way.
  3. It matters because it is one of the figures necessary for calculating how much public investment is made on higher education (although I don’t think it is counted as such in OECD reports). Many of those condemning the Government for having to revise their RAB calculation upwards actually want more public investment in HE so take a nuanced (or, depending on your view, contradictory) position. Others condemn the Government for the revisions while apparently using the same modelling as the Government.
  4. It could come down again if earnings outperform forecasts, for example. Or if the amount loaned to students were to fall in real terms. BIS are right to point out it is trying to predict all sorts of variables over a long timeframe.
  5. It could go up further – for example, through policy changes or if the extra students brought in to higher education when the student numbers cap is removed turn out to earn less than expected. The parliamentary answer lifting the RAB to 45% was not very detailed and it is not absolutely clear (at least to me) whether these extra students are included in the headline 45% RAB charge.
  6. Little is known about the accuracy of past RAB-like calculations. As a BIS special adviser, I tried very hard to find out if the original predictions for the default rates of the old mortgage-style loans (1990-98) or the early income-contingent loans (introduced in 1998 for maintenance) have turned out to be accurate. The answer to that question would probably help inform us in calculating the RAB today. No one could tell me. It was one of the (very few) occasions when I wished spads could ‘instruct’ civil servants to undertake new work.
  7. In some ways, a higher RAB can be regarded as progressive as it is low and middle earners rather than higher earners who are likely to be paying off less. It makes the system a little bit more like a graduate tax as there is less of a link between someone’s education and the amount they contribute, though it is all taxpayers that pick up the tab.
  8. A RAB charge of less than 100% is – all other things being equal – cheaper to taxpayers than wholly grant-based systems. Recent debate over whether the new system is more expensive to the public purse than the old one is not just a reflection of the loan repayment rates but also total public spending on higher education.
  9. The row over the 45% RAB charge for full-time higher education obscures the fact that the new loans for further education students have a much higher RAB charge.
  10. There is a large disparity in the RAB charge figures for part-time higher education students. The Government has in the past said they have a RAB of 65% (although perhaps that is increasing too?). Others have argued that they have a RAB of minus 7.5%. In other words, the Government will make a profit from loaning money to part-time students. The gap between these two figures is much larger than the recent 5% increase in the RAB charge for full-time students that has just occurred.
  11. We are more obsessed than other countries – more scrupulous perhaps – in constantly revising our student loan default rate. In Australia, for instance, they have a lower comparable figure but also a less sensitive one.
  12. The recent revision in the RAB charge seems to mark the end of the attempt to include a lower cost of borrowing figure in the modelling. Economists like Neil Shephard and Tim Leunig had been making a little progress in arguing that the Government borrows money at less than the 2.2% interest rate applied in the current modeling, and this has also been picked up by Emran Mian of the Social Market Foundation. If this were taken into account, the RAB charge would fall – though it would also increase the gap between the cost of borrowing and the interest rate charged to students and graduates, which could make student loans look slightly less good value.
  13. The Government is as keen as the previous Government was to sell some of the income-contingent student loan book off to the private sector. Some people have assumed the new RAB charge figure makes the book a less good proposition for potential buyers. The opposite is true. If it were incorrectly priced before, then that would have been spotted by potential buyers. If it is correctly priced now, then there is more likely to be a meeting of minds between the Government and potential buyers.

This is a blog post, not a peer-reviewed article. So now I’m going to sit back and wait for Andrew McGettigan to tell me just what I’ve got wrong…


  1. Julian Gravatt says:

    This all makes sense.
    On point 9, BIS have guessed the RAB charge for FE Is 60% but currently know nothing about the profile of borrowers or whether they’ll repay.
    More generally, it’s odd that the latest argument assumes that the main thing that matters in higher education spending is government cash flows. When government spends money on railways or roads, it counts the value of higher fare or toll income but it also assesses wider economic benefits. Spending on education isn’t only justified by the slice of future income that returns to government via the SLC or HMRC.

  2. Clare Bottle says:

    I didn’t fully understand what you said on the Today programme, although I was pleased that they chose to consult HEPI, which is independent and well-respected. Thanks for elucidating your commentary with this blog post. I think this will make your position (& ours, as taxpayers) easier to grasp.

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