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Quietly, the RAB charge is reaching worrying levels

There was a time when English higher education policy was focused entirely on loan repayment rates. As David Kernohan discovers, new data indicates that 53 per cent of money lent out will not be repaid.
This article is more than 3 years old

David Kernohan is Deputy Editor of Wonkhe

Remember when we used to worry about the RAB charge in the English fee loan system?

It feels like another lifetime. Back in 2011, the RAB (Resource Accounting and Budgeting) charge of the new model (the proportion of fee loans that would be written off) was assumed to be around 30 per cent. The most recent data puts the charge at 53 per cent for full time higher education loans, and this is predicted to rise to 54 per cent in 2020-21.

To put that at a human scale, at these prices if just one student borrowed £9,250 in 2020 the government would end up repaying £4,995. There are actual student probabilities too – for the 2019 cohort just 25 per cent of full time undergraduates are expected to repay their loans in full, with “most” of the remaining 75 per cent expected to pay at least part of their balance, or some of the interest accrued.

This figure has risen because of Theresa May’s 2017 decision (remember the speech with the coughing?) to raise the repayment threshold, which currently sits at £27,295 for post 2012 loans. Graduates do not begin to repay these loans until they earn more than the threshold – and even when they do a portion of this will be the payment of interest (currently at a maximum of RPI plus 3 per cent) rather than the principal.

The annual outlay – the amount of money handed out each year – for all HE related loans was £17.5 billion in 2019-120. This will rise to £22 billion in 2024-25 if the system remains the same. The sector is expensive. Any Covid related finance measures – say, fee refunds for students – would increase this spending.

RAB was everything

It was David Willetts who first begun to pull this government accounting concept into general policy discussions – and many will recall Andrew McGettigan’s critique of the concept and the system to which it pertains, resulting in the famous “fiscal illusion” (wherein the system looked a lot cheaper in national debt than it was in reality) was identified and addressed – making a change to the system far more likely.

Throughout, the headline tuition fee figure attracted most of the attention, and the idea of students paying “£9,000 a year” became a common shorthand that was used to attack many aspects of the sector. It was incorrect. The idea of a government subsidy to the repayment of loans by graduates was always a part of the design – those with higher earnings would pay more, progressively, and those who earned less would have their loans written off after 30 years.

LEO (Longitudinal Educational Outcomes) and associated IFS research muddied this water. It became clear that students of some subject areas at some universities were more likely to earn more, and repay more than others. Government began to make the same category error as students did – they assumed they were subsidising subjects that were previously linked to low earnings instead of investing money in key provision. The initial investment of money was nearly the same in both cases (although high cost subject provision and some specialist provision does attract additional funds), but the repayments would differ – for instance, despite studying a STEM subject nurses keep insisting on working in low paid jobs, so a part of the subsidy of loan repayments was a recognition that the UK should pay nurses better.

Artists also came in for attack – we value art and artists very poorly as regards salary, though there is evidence that the skills that underpin artistic practice benefit the student in other ways. Such was the small change of pre-pandemic policy.

Augar is coming (back)

All these forecasts of future spending rely, of course, on forecasts about the state of the general economy. With this data released on the same day as yet more emergency measures were announced to support the UK through the second wave of a pandemic, and with further measures expected to partially mitigate the impact of a no deal Brexit in December, one would do well to pause and think.

Specifically, the numbers released today are based on the OBR Central Covid-19 projection for RPI, which posits a 12.4 percentage point decline in GDP against the previous period – a projection which Paul Johnson of the IFS described as “optimistic”. The “downside” prediction would add a percentage point to these RAB predictions, the “extraordinarily optimistic” prediction for the “upside” (which would see the economy bounce back to a pre-covid prediction by the first quarter of 2021) would remove one.

Back when there was going to be a full spending review and budget we were also expecting an imminent response to the Augar report – at this stage who knows what will happen – and it is hard not to see this release as preparing the ground for that response. Higher education has clearly gotten more expensive to the exchequer, so you would expect that evidence for a problem would be useful in proposing whatever solution may be on the cards.

But still, here we are, straddling two separate oncoming economic crises. You think now would not be the time – as youth employment rates drop, new skills are needed, and demographics begin to blossom – to fiddle with the university system. Wouldn’t you?

One response to “Quietly, the RAB charge is reaching worrying levels

  1. Is it not time we started to think about an alternative repayments model? Could the sector for example afford to transfer over to a ‘graduate tax’ whereby every graduate, regardless of earnings pays 3% of their gross income as additional tax for an additional 25 years after graduating? A quick bit of fag-packet maths would show a student earning £1500 a month for 25 years paying £13,400 over that period.

    I appreciate this would require an augur-style review looking at a cross-reference of graduates and the projected annual amounts in relation to government expenditure but at least the gov would make something back, regardless of earnings.

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