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How to read the new BIS Select Committee report on student loans

  • 22 July 2014

The cross-party Business, Innovation and Skills Select Committee has today published a report on Student Loans. It is the output of an enquiry which HEPI’s former Director, Bahram Bekhradnia gave oral evidence to last year.

It is as useful and thorough as you would expect. The key points are:

  • acceptance of the official figure of a loss of 45p for every £1 borrowed to students (the RAB charge), but coupled with criticism of ‘a worrying record of miscalculation of the Department’s estimate of the RAB charge’
  • a claim that the ‘Government is rapidly approaching a tipping point for the financial viability of the student loans system’
  • a call for ‘an urgent review of the sustainability of the student loan system’, including searching for lessons abroad

HEPI’s work on the RAB charge is praised in the report, which states:

‘The evidence that we have received, both in this inquiry and previous 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.’*

The Committee also noted HEPI’s recent blue book comparing the English and Australian loan systems, which includes a section on recouping loans from graduates who have moved abroad and which concludes that New Zealand is gripping the problem more comprehensively than either England or Australia. Partly on the basis of this work, the Committee ‘recommend that the Government assess whether converting income-contingent debt to mortgage-style debt for borrowers leaving the country would aid collection of outstanding student loans’.

However, much of the report is already out of date – which is fairly typical for a parliamentary report that has been long in the making but which is then rushed out as recess begins (the House of Commons rises today).

In particular, while it calls for improvements to the methodology for calculating losses from student loans, there is no mention of BIS’s new ready reckoner, which  was published some weeks ago and which seeks to do this. There is, in contrast, a reference to the Government’s intention to sell off income-contingent student loans, which Vince Cable now appears to have ruled out.

Finally, while the reference to ‘a tipping point for the financial viability of the student loans system’ is now close to a consensus view, it obscures as much as it clarifies. If, as seems likely, this is a reference to the fact that the loan default rate is now so high that the new loans system cost much the same as the previous one, there are two important omissions:

  1. that the factors which have increased the RAB charge for the student loans being paid out now also raise the RAB charge for the older loans so the counterfactual (the cost of the old system) is changing too
  2. that, as has been highlighted on this blog before, the RAB charge for part-time students and FE students is officially calculated to be closer to 65 per cent: if 45% represents ‘a tipping point’, then how should we describe 65%?

* Last week, HEPI was given the ‘One to Watch’ award in the Prospect Think Tank of the Year Awards 2014. This was partly on the basis of the impact on policymakers of our work on the RAB charge.


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