The idea of a single ‘tipping point’ for the RAB charge is misleading

by Claire Crawford, (Institute for Fiscal Studies and University of Warwick), Rowena Crawford (Institute of Fiscal Studies) and Wenchao Jin (Institute of Fiscal Studies)

The raising of the cap on tuition fees charged by English universities to £9,000 per year in 2012 (and the accompanying increase in student loans) means that students are now leaving university with considerably more debt than they did under the previous system. Most mid-to-higher earning graduates are also repaying substantially more. A recent report published by the Institute for Fiscal Studies (IFS) estimates that students will leave university with around £20,000 more debt under the new system compared to the old system, with graduates in the top half of the earnings distribution paying back between £8,000 and £22,000 more in today’s money than they did before.

But despite these huge increases in private contributions, it does not currently look like the government will save much money as a result of the reforms. A second report published by the IFS estimated that the total taxpayer contribution to the teaching of undergraduates (encompassing both  teaching grants and the long-run cost to the government of providing student loans) under the new system will be just 5% less than it was under the old system (around £1,250 per student in 2014 prices). The big winners seem to be universities, who have seen an increase in funding of around 25%, on average.

Underlying these figures are estimates of the RAB charge under both the pre- and post-2012 systems. The RAB charge provides an indication of how much it costs the government to lend money to students: it takes into account both the fact that not all loans are repaid, plus what it costs the government to borrow the money it lends to students. We estimate that, for young English full-time undergraduates, the RAB charge would be 37.6% under the old system compared to 43.3% under the new system: for every £1 loaned to these students, it costs the government 43.3p, so the public subsidy has increased by 5.7p as a result of the reforms.

Our estimate of the RAB charge under the new system is not very different to the government’s recently announced estimate of 45%  (albeit for a different group of students). This figure has prompted intense speculation about whether the new system could actually end up costing taxpayers more than the old system, fuelled by estimates produced by London Economics  which suggested that a 48.6% RAB charge represented the ‘tipping point’ beyond which the cost of the new system outweighed the cost of the old system.

The idea that there is a single ‘tipping point’ is misleading, however, as, in reality, the main uncertainties that could increase the estimated cost of the new system (such as lower future earnings growth and the avoidance of repayments) would have made the provision of loans under the old system more costly as well.

For example, we estimate that if a randomly selected 10% of graduates cannot be traced for the collection of loan repayments under the 2012 system, the estimated loan subsidy would be 49% and the average taxpayer contribution per student would be £26,893. This is higher than the estimated cost of £25,847 per student for the 2011 system. But the comparison is not fair, because the 2011 estimates assume perfect compliance – i.e. that no graduates are untraceable. If instead we make a similar assumption about the proportion of graduates who cannot be traced in 2011, the total taxpayer contribution would actually be £27,365. Thus, the cost of the 2012 system would still be lower than the cost of the 2011 system, even though the estimated loan subsidy under the new system is greater than 48.6%.

Arguably, the only factor which would have an impact on the cost of the new system but not the old one is changes to future fee levels (or changes to the terms under which student loans are offered). For example, assuming students borrow more from the government in order to cover any increase in fees, we estimate that a rise in all fees of just £500 (from the average of around £8,600 estimated for our cohort in 2012) could raise the taxpayer contribution under the new system to the same as under the old one.

It is worth noting that these estimates are extremely sensitive to assumptions about what happens to graduates’ earnings over the next 30 years. Our baseline estimates assume that earnings grow in line with forecasts of earnings growth made by the Office for Budget Responsibility (OBR) in December 2013. If instead earnings were to follow the more optimistic path forecast by the OBR in March 2012, the estimated average long-run cost to the government of the new system would fall to 34p per £1, and the amount saved relative to the old system would increase from 5% to 15%.

The 2012 reforms to the higher education finance system in England were certainly controversial, and on current estimates they do not look like they will save the government very much money. But whether and how much money will be saved will not be known for decades, as it depends on what happens to graduate earnings and repayment behaviour over the next 30 years, which we (and the government) can only estimate at this stage. The impact of the reforms on the public finances has therefore primarily been an increase in uncertainty, with the certain costs of providing teaching grants replaced by the highly uncertain costs associated with issuing larger student loans.

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