Student loans: what factors affect their cost and how real is the debt?

The cost of student loans is captured in the budget as the RAB charge (some background to that here).

The RAB charge is a calculation of how much of the loan being issued is expect to go unpaid and the cost of charging an interest rate which is below the cost of government  borrowing.  It is derived from a complex model, which requires estimates of the distribution and life-time pattern of graduate earnings.  Outside government, it is very difficult to estimate how certain changes in the loan scheme or the wider world might affect the RAB charge, although London Economics (see this briefing published on 12 March, for example) has a model which has been drawn on by bodies such as the IPPR.

The figures  at pages 128 to 144 to of this IPPR report  consider the RAB implications  of possible changes to the loans scheme  in England and are based on the London Economics model.  They would not apply in exactly the same way in Scotland, but  do give a feel for how the RAB responds to particular changes to the loan scheme.

There are 2 student loan schemes in operation at present.  Plan 1 is the old one, still used for new students from Scotland and Northern Ireland.  Plan 2  has applied to new students from  England and Wales since 2012.

The government has no (direct, at least) control over graduate earnings.   The things  within government control which affect the cost of loans are:

• the interest rate subsidy (higher under Plan 1 than Plan 2)
• the  earnings threshold repayment (£16,910 from April 2014 in Plan 1, £21,000 in Plan 2)
• the percentage rate applied to earnings over the threshold (9% in both)
• how quickly the government writes of the debt (after 25 years in Plan 1 for rUK students, 35 years in Plan 1 for Scottish students, 30 years in Plan 2; or at 65 in all cases, if sooner)
• how large a debt individuals are expected to carry and therefore how likely it is – when combined with the factors above and estimates of graduate earnings – that the whole amount will be be repaid (the sums are much higher in England than in the devolved administrations)

It is easy to forget that student loans are themselves a significantly subsidised form of funding.  So much so, that the IPPR estimates that in England, even with the switch to  much higher fee contributions, graduates as a whole will only be covering a minority of their teaching cost. This is because so much loan in England  will eventually go un-repaid.  The IPPR report contains some useful tables which bring out that women, in particular, are much less likely than men to earn enough to repay the scale of debt now commonly expected under the post-2012 arrangements.  There is indeed a debate going on south of the border about how to reduce the cost of the loan scheme and so free up more public funding for additional opportunities to study, particularly in forms which are less expensive than what is sometimes described as “the traditional boarding school model”.

The issues are a bit different in the devolved administrations, where lower levels of debt are expected and so students are far more likely to have repay most or all their debt, even if they are relatively low earners.   This is an important point.  It means that headline student debt is much more “real” in Scotland than England.  Aware of the debate in England, someone suggested to me recently that unequal debt distribution in Scotland isn’t a problem, as the debt is anyway unlikely to be repaid.  But that is not so. In Scotland, the sums at stake for students from low-income backgrounds – in the £20,000 to £30,000 range for degree students, less for HN students on shorter courses – are high  enough to make a serious dent in future  take-home pay, but low enough to mean that most graduates can be expected to repay most or all of the debt, particularly when  combined with the more stringent repayment rules  applying to Scots under Plan 1.