Budgeting rules adjusted to manage costs of student loans

Change in guidance meant to ‘incentivise’ BIS to check long-term costs

April 10, 2014

The government has changed the budgeting rules for student loans to allow for unpredictability in forecast repayments, saying the change is designed to “incentivise” control over loan spending.

One expert suggested that the development showed spending rules could be tweaked, potentially offering scope for a major change such as the introduction of a graduate tax.

The change comes amid widespread media coverage of the government’s rising estimates of the portion of student loans that will never be repaid by graduates under the £9,000 tuition fee system. That estimate has risen from an initial 28 per cent to 45 per cent.

This estimated portion of loans never to be repaid – known as the resource accounting and budgeting (RAB) charge – must be budgeted for each year by the Department for Business, Innovation and Skills. The rising estimate for the RAB – caused by lower forecasts of graduate earnings – is one possible factor in recent BIS cuts to other parts of the higher education budget.

However, in budgeting guidance for 2014-15 that BIS published last month, the department says that the Treasury “will set a target impairment for loans”. It adds that any variations in the amount of money needed to cover loan write-offs that go beyond the original estimate will be charged to two separate areas of the department’s budget, including one that allows for sudden changes in government spending.

Andrew McGettigan, who originally highlighted the changes on his Critical Education blog, writes: “Prima facie, this looks like a sensible measure to protect other programmes in Business, Innovation and Skills from recent, unexpected developments around student loans. But we need to know where the ‘target impairment’ is to be set.”

Some suggest there may potentially be implications from the measure if any Labour government were to pursue a graduate tax – which requires a change in Treasury rules.

Gavan Conlon, leader of the education and labour market team at London Economics, which has done research on the RAB charge and on a possible graduate tax, said the change showed that “the accounting rules can be amended relatively straightforwardly to reflect changing circumstances – and this could happen again if there are further changes to HE fees and funding”.

A BIS spokeswoman said: “BIS and HMT [the Treasury] have agreed a RAB and stock charge level for [post-2012] loans in each financial year, which is used to share the long-term financial risk associated with student loan repayments.”

The charge was set at 36 per cent for 2013-14, she said. She added: “This is not a target rate for government affordability of the loan system, rather it forms part of a framework to incentivise the department to manage the long-term costs of the system.”

But Bahram Bekhradnia, president of the Higher Education Policy Institute, said that although the changes spread the cost of rising RAB estimates, it might nevertheless “mean there will be less to spend on other things”.

He added: “It is more transparent and easy to forecast expenditure when it is very largely based on government grant, rather than loans that may or may not be repaid.”

Liam Byrne, the shadow universities minister, said the change was “another example of this Tory-led government convincing themselves that clever accounting tricks will hoodwink the public”.


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