The DfE student loan repayment model and Advanced Learner Loans model forecast the future repayments that DfE expects borrowers to make on loans taken out under the English student loan system, which are used to value total student loan balances in the DfE annual accounts. Future repayments can also be presented as relative measures of Government subsidy, which includes the Resource Accounting and Budgeting (RAB) charge and stock charge.
The Resource Accounting and Budgeting (RAB) charge and the stock charge
The RAB and stock charges are the estimated cost to Government of providing a subsidy for the student finance system. They are the proportion of loan outlay (the RAB charge) and of the total outstanding loans (the stock charge) that are expected to not be repaid when future repayments are valued in present terms.
See the technical notes document accompanying this publication for more information.
For 2019-20 the key results are:
- The RAB charge for Plan 2 full-time higher education loans is 53%. While most borrowers will repay at least some of their loan, the income contingent nature of the loans means that most loan borrowers are not expected to fully repay their whole loan balance in full. This is because of the combination of the size of their initial loan amounts, the level of the earnings threshold above which borrowers are required to make repayments (£25,725 in 2019-20) and the interest rate on the loans that varies between RPI and RPI+3% depending on a borrower’s income and whether they are still studying.
- For part-time higher education students, the RAB charge is 45%. Part-time students generally take out smaller loans than full-time students, meaning they are more likely to repay a higher proportion of their loans. Maintenance loans for part-time students were extended to on-campus, degree level borrowers only in 2018/19. Distance learners and on-campus, sub-degree borrowers were eligible for tuition fee loans only.
- The Advanced Learner Loans RAB charge is 69%. While Advanced Learner Loan borrowers typically take out smaller loan amounts than higher education loan borrowers, they are also expected to have comparably lower future earnings than higher education loan borrowers. A proportion of the loans are also written off early, as students that receive a loan while studying for an Access to Higher Education Diploma will have their loan balance written off if they go on to complete a higher education course. The increase in Advanced Learner Loan RAB charge relative to the 2018-19 value is largely due to the provision of improved data inputs to inform Advanced Learner Loan holders earnings forecasts. For more information see the technical notes accompanying this release.
- Master’s loans have a RAB charge of 0%, meaning that it is expected that the overall net present value of borrowers’ future repayments will be at least as high as their initial loan outlay. Compared to the other loan products, master’s loan borrowers generally receive smaller loan amounts than Plan 2 borrowers, and are expected to have higher earnings. They also have a lower repayment threshold than Plan 2 borrowers (fixed at £21,000 until 2020-21) and a higher interest rate of RPI+3% that will result in many of them repaying a higher amount.
- The Plan 1 stock charge is 37%. This covers loans issued to students that started courses between academic years 1998/99 and 2011/12, which have not been repaid in full by the start of 2019-20. It is lower than the Plan 2 higher education stock charge as these borrowers took out smaller loans and have a lower repayment threshold (£18,935 in tax year 2019-20). This is despite Plan 1 having a lower interest rate and entrants from 2006/07 having their loans cancelled 25 years after they become liable to make repayments (compared to 30 years under Plan 2). Note that these figures do not provide a direct comparison of the overall level of Government subsidy provided to the higher education sector under each system, as the Plan 1 system also involved a higher level of teaching and maintenance grants than the current Plan 2 system (a comparison of how the balance of contributions between taxpayers and students has changed over time under different systems can be found in the “Estimating the changing cost of the English higher education system to taxpayers and students” annex of the Augar Report).
Figure 4 shows the forecast RAB charges in financial years 2018-19, 2019-20 and 2020-21. These cover loans issued in each financial year to English domiciled students studying in the UK and EU domiciled students studying in England. RAB charges forecast up until financial year 2024-25 are available in this release.
Figure 5 shows the forecast stock charges in financial years 2018-19 and 2019-20. These cover loans issued, up to the start of the financial year, to English domiciled students studying in the UK and EU domiciled students studying in England.
The Stock and RAB charge forecasts rely on earnings and repayment projections forecast over the next 30-40 years, and are sensitive to the assumptions used in the models. For example, an RPI of 1 percentage point (pp) lower beginning from financial year 2019-20 would lower the forecast 2019-20 RAB charge by up to 5pp for Plan 2 loans. The percentage point change in 2019-20 plan 2 RAB charge forecasts as a consequence of varying key individual economic and policy model inputs is documented in the RAB charge sensitivity data accompanying this publication. For more details please see the methodology document accompanying this release.
Since the last student loan forecasts release in June 2019, there have been revisions to the data, economic assumptions, policies and modelling methodology used within the student loan repayment and earnings models. These updates will all contribute to varying degrees to any changes over time in the forecast of figures such as RAB charge, stock charge and percentage of borrowers expected to fully repay their student loans.
Though this is not the only driver, the use of OBR Central Covid scenario projections for RPI, bank rate and earnings growth increases the RAB charge for all plan types in comparison to forecasts as of June 2019. Updates and improvements to the forecast models are responsible for the largest changes in forecasts relative to those published for 2018-19. More details on this can be found in the technical notes accompanying this publication.
In addition to the Central Covid scenario, the economic projections of which were used to produce the repayment forecasts in this publication, the OBR published an Upside and Downside Covid scenario in their Fiscal Sustainability Report, July 2020. The Upside scenario projects a sharper rebound in activity due to Covid than the Central scenario, with no medium-term economic scarring, whereas the Downside scenario projects a slower recovery than the Central scenario, with more significant economic scarring. The Plan 2 2019-20 RAB charges increase by around 1pp relative to our nominal projections when using economic inputs from the Downside OBR Covid scenario, and decrease 1pp relative to our nominal projections when using economic inputs from the Upside OBR Covid scenario.
Figure 6 shows the transfer proportion forecast for financial years 2019-20 to 2024-25. The transfer proportion is used within the Office for National Statistics (ONS) public sector finance statistics. Under the partitioned loan transfer approach, student loan outlay is partitioned into lending and transfer elements. Conceptually the transfer proportion is the fraction of student loan outlay identified at loan inception as government expenditure, in recognition that this portion of the loan is unlikely to be repaid.
The transfer proportion differs from the RAB charge in the way future repayments are discounted to present values. This reflects the different use of the transfer proportion and RAB charges. Further information is available in the ONS discussion on the alternative valuations of future repayments.
The 2018-19 transfer proportions provided in Figure 6 are forecast using the model configuration from the previous release in June 2019 (though transfer proportion figures were not published in the June 2019 release). Since this time, there have been revisions to the data, economic assumptions, policies and modelling methodology used within the student finance forecasting models. The transfer proportion forecast for Advanced Learner Loans sees an increase of 16pp relative to the 2018-19 value. This is largely due to the provision of improved data inputs to inform Advanced Learner Loan holders earnings forecasts from 2019-20. For more information see the technical notes accompanying this release.
Figure 7 shows the proportion of students starting courses in the 2019-20 academic year that are forecast to fully repay their loans. This is lowest for full-time higher education borrowers at 25% as they will have the highest loan balances. The remaining 75% will generally repay part of their loan balance, with some almost fully repaying. The higher education full-time RAB charge is therefore closer to that of part-time higher education borrowers and Advanced Learner Loan borrowers, despite the lower proportion that finish repaying their loans.
Despite the 0% RAB charge, around 35% of master’s loan borrowers are expected not to fully repay their loan during their 30-year repayment term. Similarly to full-time higher education borrowers, master’s loan borrowers who do not fully repay will still generally repay part, or most, of their loan balance. In addition, these borrowers have interest rates fixed at RPI+3%. This may mean that the discounted repayments of some borrowers meet or exceed the total outlay provided, but do not fully pay off the interest accrued on the loan before the end of the repayment term.
Figure 8 shows the amount of student loan repayments forecast to be made each year from 2019-20 to 2024-25. They are expected to rise steadily over this period from £2.7 billion in 2019-20 to £4.3 billion in 2024-25. The rise is largely a result of increasing numbers of Plan 2 borrowers becoming liable to make repayments over this period, whereas the amount repaid by Plan 1 borrowers flattens out. It is expected that the number of student loan borrowers liable to make repayments will rise from 4.3 million in 2019-20 to around 7.0 million in 2024-25.
The SLC have published preliminary repayments figures for 2019-20 in their August 2020 release. From financial year 2019-20 the frequency in which repayments data was provided to SLC by HMRC increased from annually (within one year of the financial year ending) to weekly. Repayments are reported within the financial year they are posted to customers accounts, and so prior to this more frequent data sharing repayments posted to a given financial year were mostly from the year before. As a result of this change, which effectively provides a more up-to-date representation of student loan balances at a given point in time, total repayments reported by SLC for financial year 2019-20 include almost two years’ worth of PAYE repayments. The impact of this transition will normalise in financial year 2020-21, where a single years' worth of PAYE repayments will be reported under the updated data sharing conditions. This situation means that the repayment forecasts in Figure 8 for 2019-20 are not directly comparable to the figures published by the SLC.