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DELIVERY OF FUNDING PROJECT:ANALYTICAL PAPER

Background

1. A number of Higher Education Institutions in Scotland have moved to a new pattern of the academic year, comprising two longer semesters and a shorter exam period, rather than three equal terms. The Deputy First Minister has asked officials in the Funding for Learners ( FFL) Division of the Enterprise, Transport and Lifelong Learning Department to examine whether the amounts and timing of student support (student loans and Young Students' Bursary) are still appropriate for this pattern.
2. Given the extent of cross-border student flows ¹, it is important that the interests of the Department for Education and Skills ( DfES), Welsh Assembly Government ( WAG), and Department for Employment and Learning, Northern Ireland ( DELNI) are also recognised in the consideration of policy options.
3. The Executive has established a Delivery Group to look in detail at the options for changing the amounts and frequency of HE student support payments from academic year 2006-07 and beyond. The Delivery Group is comprised of representatives from FFL (which has the policy lead and will provide the secretariat for the Consultation), Higher Education and Science Division, Analytical Services Division, Scottish Executive Finance Group, Student Awards Agency for Scotland, Student Loans Company, DfES, DELNI and the Welsh Assembly Government.
4. The Delivery Group published a consultation paper on 1 February 2005 which invited comments on the options being considered for changing the distribution of payments of living costs support. The consultation will run until 29 April 2005.

The Analytical Paper

5. The purpose of this Analytical Paper is to examine the respective costings of the various options for changing the frequency of student loan and Young Students' Bursary payments ² for the academic year 2006-07 and beyond (as a long-term solution). ³ It should be noted that there is no current provision in the ETLLD budget to finance the options.
6. The options examined here are numbered in line with the sequencing in the consultation paper:

Option 1a. Leaving the current (2004-05) payment pattern unchanged: that is, arranging student loan payments in instalments of 33%, 33% and 34%.

Option 1b. Using the interim arrangements for 2005-06 as the long-term solution: that is, student loan payments would be in instalments of 36%, 33% and 31%.

Option 2. Proportionate payments at the start of each term/semester/study block.

Option 3a. Monthly payments for all, with front loading of the first 2 months payments.

Option 3b. Monthly payments, with the current percentages (33%, 33% and 34%) of payments retained within each term.

Option 4. Full student choice between monthly, termly or semesterised (study block) payments.

7. There are a number of important points to note about the presentation of the costings. Three types of costs are identified:

• there is a cost of providing student loans (a resource cost). This is the one-off cost associated with the total value of student loan payments shifted between financial years;
• the implementation costs: i.e. the one-off costs brought about by introducing changes to IT and other systems. It should be noted that, under this heading, in all of the tables given below, the Scotland figures include details of the costs for paying bursaries in line with the various options explored; the figures for the other administrations are generally only in terms of loan payments.
• the additional running costs associated with implementing the changes in each year from 2006-07 onwards.

8. The cost of each option will clearly depend on whether English, Welsh and Northern Irish- domiciled students studying in Scotland are included or not. Accordingly, the costings are presented for Scottish-domiciled students in Scotland (only) and for all UK-domiciled students in Scotland.
9. The 2005-06 baseline for costs is different for Scotland, compared with the other administrations, because the Scottish Executive has introduced an interim change to the payment pattern for student loans in that year. The proportion of payments made each term will be 36%, 33% and 31%, compared with the current proportions of 33%, 33% and 34%.
10. All of the costs given here in terms of resource accounting costs and systems changes and development costs are estimates. Sometimes a banding range is given, with the caveat that the costings might need to be examined further via a more detailed financial appraisal. It should also be borne in mind that, due to unknown variables, there is a potential risk of under- and over- estimation.
11. The assumptions underpinning each option are set out clearly. In the case of Option 3a, for example, the individual administrations have examined the average course lengths within HE and FE institutions and have provided costs based on these estimates. This is important, because the distribution of monthly payments between financial years affects the resource costs of the option. Some institutions in Scotland start the academic year earlier than the average for elsewhere in the UK. Annex A contains a pie-chart showing the average breakdown between academic terms for Scottish institutions. Term 3 mainly falls within the second financial year.
12. This Analytical Paper is published in line with the Executive's commitment to the principles of open government and Freedom of Information.
13. OPTION 1a

14. This is, in effect, the "do nothing" option and would reverse the interim changes for Scottish-domiciled students in Scotland that are being introduced in 2005-06.
15. There would be a reduction in the costs of providing loans to the Executive of nearly £2 million, as 3% of the total student loan account would be put back into the second financial year within the academic year compared to the interim loan payment distribution. However it should be noted that the current arrangements do not provide an efficient method of supporting semester-based payments for Scottish-domiciled students only. Manual workarounds are required by the SLC when requirements differ based on the domicile of the student. The costs (to the SLC) of these workarounds could be up to £80,000 per annum, depending on the number of institutions involved. ⁴
16. As this is the current ratio - and given that they are not making any interim changes for 2005-06 - there are no additional costs for the other administrations.

OPTION 1b)

17. This is a variant on the do nothing/little option and would mean that the interim changes introduced for 2005-06 for Scottish-domiciled students in Scotland would also be the final changes. There would be minimal additional cost to the Executive as the resource cost attached to the interim change has already been financed. In terms of SLC costs, there would be no additional costs for option 1b) as this system will be in place for 05-06 anyway.
18. If all UK-domiciled students were to be included, the resource costs to the other administrations would be approximately £800,000. The SLC would also have additional costs.
19. As for Option 1a, there would be a consequential cost of supporting institutions that wanted to move to a two-semester instalment arrangement.

OPTION 2

20. This pattern of payments would more accurately reflect the length of time in each study period although, it should be noted, for the individual student, the proportions would be determined by term length of the student's institution. In effect, on a weekly basis, there would be roughly equal amounts of support each week of the academic year.
21. We have costed the option of paying a proportionate amount of support at the start of each semester and the start of the exam period (the previous 3 ^rd term, though usually much shorter). This would usually be September, January and April, though some individual institutions have different patterns.
22. The resource costs for Scottish-domiciled students in Scotland would be approximately £3.7 million. In all UK-domiciled students studying in Scotland were included, the resource costs to the other administrations would be another £1.2 million. The cost to SAAS of systems change would be nil as their systems are already able to pay proportionate amounts of support in this way.

OPTION 3a

23. This is the monthly payment option with front-loading. Rigid payment dates would be required, with the only variations being the actual start date of the academic year and the need to consider payment over 9 or 10 months. An example of this would be: 2/10ths of student loan paid in September/October and 1/10th paid monthly between October/November and May/June (8 payments). Introducing this arrangement for Scottish-domiciled students would incur a resource cost of around £3.7 million and the SLC and SAAS advise that there would be combined implementation costs of between £700,000-£900,000.
24. Including all UK domiciled students studying in Scotland would incur a total resource cost to the other administrations of approximately £900,000. There may also be additional implementation costs for the SLC.

OPTION 3b

25. Students would continue to receive 66% of their support prior to 1 April (i.e. in the first financial year covered by the academic year of their course) and 34% of their support after 1 April. The monthly payments made to the student would be determined by the number of months the course is attended in the periods before and after 1 April.
26. So, for example, if a student whose loan entitlement is £3000 begins his/her course in September and ends it in June, the payment profile would be 7 monthly instalments before 1 April and 3 after 1 April. As the total amount received before 1 April would continue to be 66% of £3000, with 34% of £3000 paid after 1 April, the first 7 instalments would be £283 (£1980 divided by 7) and the final 3 instalments would be £340 (£1020 divided by 3).
27. For the Scottish Executive, there would be a saving in the resource accounts of nearly £2 million, as we would be reverting back to the current (i.e. pre-2005-06) position. However, there would be implementation costs at both SAAS and the SLC. Including all UK-domiciled students studying in Scotland, there would be no resource cost/saving to DfES, DELNI and WAG, as these administrations are not making any interim changes for 2005-06.
28. It should be noted that the costs for implementing either of Options 3a or 3b, or a mix of them both, could be shared across the participating administrations. For example, the Scottish Executive could go for Option 3a and the other administrations for Option 3b, with the sharing of the implementation costs across the administrations. For the SLC there would be economies of scale in developing these options in parallel.

OPTION 4

29. In order to cost this option, it is necessary to make assumptions about the take up of the monthly/termly/semesterly alternatives. Accordingly, we have collated 2 sets of costs: first, assuming a 50% take-up of the monthly option (3a) with the remaining 50% taking up the termly and semesterly (blocks of study) option (2); second, a 75% take up of the monthly option (3a) and a 25% take up of the termly and semesterly option (2). In practice, the rate of take-up would be likely to change over time, once awareness of the choice and benefits spreads. Option 4(i) below uses the first take-up assumption and 4(ii) the second. It is seen that there is only a marginal difference in the two sets of costs.

1 ^st set of assumptions: Option 4(i)

2 ^nd set of assumptions: Option 4(ii)

Summary table of cost of options for 2006-07 onwards: £ thousands

The table below draws together the data from the previous tables. A separate line for the total establishment costs is identified; this combines the costs in the initial year of shifting student loan payments between financial years and the one-off implementation costs brought about by introducing changes to IT and other systems.

Scottish-domiciled students studying in Scotland only

UK-domiciled students studying in Scotland

Note: a figure in brackets indicates a saving, compared with the 2005-06 interim baseline

33. As noted, the total establishment costs are the one-off outlays incurred in the initial year. In addition to this, detailed above, are the annual running costs to the SLC and/or SAAS. As these are recurring costs in future years, they can be discounted to the present to give a present value. This enables a fairer comparison of each option. Taking account of both the initial establishment costs and the recurrent annual running costs, the net present costs for each option are outlined below.

Scottish-domiciled students studying in Scotland only:
Net Present Costs (£000s)

All UK-domiciled students studying in Scotland:
Net Present Costs (£000s)

Note: a figure in brackets indicates a saving, compared with the 2005-06 interim baseline

Discussion

Implementation Costs

30. In the examination of the different options, we have focused on the establishment costs (i.e. the resource costs of shifting payments between financial years, plus the set-up implementation costs), as opposed to combination of establishment costs and running costs, as the former are much more substantial. For Scottish-domiciled students only for those options that would require moving payments between financial years the total establishment costs range between circa £4 million (option 2) to circa £5 million (options 4i) and ii)).
31. It will be noted, however, that the annual running costs of Options 4i and 4ii are much higher than the annual running costs of the other options. For Scottish-domiciled students when the net present costs are examined, Options 4i) and ii) are higher again reaching circa £6-£6.5 million when the annual running costs are discounted over 5 years.

Savings

32. The funding of the interim arrangements established by the Scottish Executive for 2005-06 will be a "one-off" measure financed by savings made elsewhere in the 2005-06 budget. If these arrangements are maintained in future years, there will be no additional costs, compared with the 2005-06 baseline, as, in effect, the additional funding requirements for each year would be consistently brought forward from the following year. This paper has identified that savings will occur, in the Scottish Executive's resource accounting, if these interim arrangements are not maintained in 2006-07 and beyond. It should be emphasised that these would not be recurrent savings to the ETLLD budget, but would be the reverse "one-off" taking effect in 2006-07.
33. This Analytical Paper has focused on the costs to the government administrations of introducing the various policy options under consideration. It should be noted, however, that there is clear evidence from the FFL Division's Hardship Funds Project, which followed the publication of the Review of Funding of Learners report in September 2004, that there would be substantial savings to the Hardship Funds budgets if one of the monthly payments options were implemented. We do not attempt to quantify these savings here, but this will feed into the assessment of policy options which the consultation is informing.

Economies of Scale

34. It is clear in all of the options there would be substantial economies of scale if all the UK-domiciled students in Scotland were included. For example, for Options 3a, 3b and 4, the cost would be substantially less for Scotland if it were part of an all UK-domiciled programme than it would be for Scotland on its own.

Options 1a) and 1b)

35. The costings presented above confirm that the "do nothing" or "do little" options would incur costs in their own right. As noted, the current arrangements underpinning Option 1 do not enable an efficient method of supporting semester-based payments for Scottish-domiciled students only. Manual workarounds are required when requirements differ based on the domicile of the student. The costs (to the SLC) of these workarounds could be up to £80,000 per annum, according to the number of institutions involved.

Glossary

Delivery of Funding Project: Delivery Group
8 April 2005

ANNEX A OF SUMMARY ANALYTICAL PAPER

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