Cost of new fee regime may soon exceed the old

Hitting RAB charge ‘threshold’ will make £9,000 system more costly than old

March 20, 2014

Source: Alamy

Additional problems: rising estimates of student loan subsidies are blamed by some for cuts to the teaching budgets

The government “will not have saved any money” by trebling fees to £9,000 and scrapping nearly all direct grants to universities, a senior sector figure has said in response to data showing the “break-even point” for the new system could be rapidly approaching.

London Economics, which carried out research for the Department for Business, Innovation and Skills for the 2011 White Paper, last week published a report calculating the point at which the rising estimated cost of subsidising student loans will make the £9,000 system more expensive than the old.

Rising estimates of student loan subsidies are seen by some observers as a contributing factor to government funding cuts in other parts of the 2014-15 higher education budget, unveiled by the Higher Education Funding Council for England last week.

The bulk of loan money lent to students does not affect the budget deficit. But London Economics notes that the resource accounting and budgeting (RAB) charge – the estimated portion of loans that will never be repaid by graduates – does constitute expenditure.

London Economics, whose latest analysis builds on previous research carried out for the Million+ group of newer universities, says that “if the estimated RAB charge (ie, if the proportion of the fee and maintenance loans never recovered) increases beyond 48.6 per cent, the economic cost of the 2012-13 higher education reforms will exceed the 2010-11 system that it replaced”.

David Willetts, the universities and science minister, told MPs on the Commons BIS committee in January that the RAB estimate on new loans would be revised upwards from its current 40 per cent – the latest in a series of upward revisions from the government’s original 28 per cent.

Pam Tatlow, chief executive of Million+, said: “If these assessments are correct, and bearing in mind there is some modelling in BIS that the RAB charge is much higher than 40 per cent, it will mean that all the upheaval in higher education finance and funding will not have saved any money in the long term.”

Andrew McGettigan, author of The Great University Gamble, said: “The [government’s] original claim was that around £1 billion per annum would be saved by moving to the new regime and that such savings were required to meet the austerity agenda…Has the upheaval been justified if there is minimal saving?”

Asked for a comment on the London Economics report, a BIS spokeswoman quoted comments made by Mr Willetts to the select committee, which she said represented the department’s latest position.

Mr Willetts said: “I do not want to speculate on the future RAB. I am levelling with the committee. This process whereby every few months the RAB charge goes up because of a new earnings forecast is almost inherent in the system when you have been in a recession and have had low earnings. I do not think the process of revising the RAB charge is suddenly going to stop.”

Bahram Bekhradnia, president of the Higher Education Policy Institute, said that current BIS modelling on future graduate repayments is “still based on an assumption that the average earnings growth will be spread equally among all earners. That flies in the face of all the evidence.”

Correcting the modelling, as the department is set to do, “adds another 4-5 per cent to the RAB” on top of the current 40 per cent, he continued. Then the RAB “gets very close to the break-even point at which, if students were paying just £3,000 a year under the previous regime instead of £9,000, it would cost the government no more money”, Mr Bekhradnia said.

But Emran Mian, director of the Social Market Foundation who was the lead civil servant on the 2010 Browne Review which ushered in the new loans system, said: “If…we’re able to keep growing as an economy and in high-value areas where there are lots of well-paid graduate jobs then the RAB charge will come down in future, below the current level.”

Hefce told universities last week that “most teaching budgets” would be cut by almost 6 per cent next year, which Mr Bekhradnia said was “one consequence of the increasing cost of the loans”.

Million+ said the most important aspect of the cuts is to do with the provision of extra student places, as the government moves towards abolishing student number controls without extra core funding. If there are 30,000 extra students as forecast and with no inflation proofing of fees, the cut in funding for 2014-15 will equate to 9 per cent, it argues.

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