Who pays?

The ifs published a briefing note on the impact of the changes to student finance announced in the budget. There was plenty of media coverage, but as always, there’s more in the report than has yet been covered.

Firstly, the background. In his budget the Chancellor announced two specific decision, and three proposals for consultation relating to higher education:

Decisions

• Increasing the maximum loan to £8,200
• Replacement of maintenance grants with loans 

For consultation:

• Freeze the £21,000 repayment threshold (ie let inflation reduce the real value)
• Allowing institutions with high teaching quality to increase the £9,000 fee in line with inflation
• Review the discount rate applied to student loans and other transactions to bring it into line with the government’s long-term cost of borrowing.

The coverage of the ifs report rightly – because they are the certainties – focuses on the two decisions. But the ifs report also analyses the effect of the three proposals for consultation, and its two things about these that I want to highlight.

Firstly, the effect on government borrowing. The RAB charge is the measure of how much student debt the government expects to have to write off. At the moment the RAB charge stands at 39.2% - the government expects almost £2 in every £5 it lends to students to be written off as un-repayable. If all five measures are introduced, the ifs expects the RAB charge to reduce to 21.9% - effectively halving the amount of debt write off. This is all to do with changing the discount rate. In the ifs’s own words:

The proposal to reduce the discount rate is essentially an accounting ‘trick’: it will not change the real resources going to students or universities; nor will it increase repayments from graduates. Instead, it means that future repayments will be valued more highly today. This has the effect of increasing the value (but not the cash amount) of repayments made in future, hence making it appear that the cost of the system (in net-present-value terms) is lower than it was before.

And secondly, a change in the balance of who pays for higher education. To quote from the budget document:

The government must therefore ask graduates to meet more of the cost of their degrees once they are earning.

Using the ifs data it is possible to work out the graduate’s share of the costs of their education, as in the following table.

So, at the moment the costs are shared roughly equally between the taxpayer and the graduate. If all of the budget reforms are implemented, the graduate share increases to 75% of the total cost. What looks like a technical accounting decision has real consequences for individuals.