THE STUDENT LOANS SYSTEM
To address the questions that will be raised in this consultation paper, it is essential to have a sound understanding of the how the current loan system works. The accounting systems surrounding loans can appear complicated, as can much of the terminology used, so this will hopefully clarify where the financial pressures lie at the moment. This will allow a better understanding of how future scenarios may change this.
Student loans are demand led and are paid on an entitlement basis. This means that if someone has a place in HE and meets the eligibility criteria, they are due to receive a loan. All funding for student loans in Scotland is accounted for through the budget for the Student Awards Agency for Scotland ( SAAS).
The SAAS budget for the next three years, from The Scottish Budget Spending Review 200729, is set out below (Table 6), followed by definitions of what each element of the budget is used for. It should be noted that since the publication of this document, the cost of student loans figure (line 6) has been reduced from £74.4 million to £71.4 million in Scotland's Budget Documents 2008-0930: The budget for future years has been adjusted to reflect this. All other figures remain the same.
1. SAAS Running Costs
2. SAAS Capital Charges
3. Fees, Grants and Bursaries
4. Student Loans Company Administration
5. Unwinding of Debt Sale Subsidy Provision
6. Cost of Student Loans
7. Unwinding of Discounts on Write-off Provision
8. Student Loans Net New Lending ( AME)
9. Student Loan Interest Subsidy to Banks ( OTME)
Source: Scottish Government
1. SAAS Running Costs - Staff and other cost of running SAAS. Includes capital costs of systems development and equipment.
2. SAAS Capital Charges - Cost of capital and depreciation charges.
3. Fees, Grants and Bursaries - Expenditure on fees and non-repayable awards to students, including the Young Students Bursary and supplementary awards. This also includes discretionary funds (also known as hardship or widening access funds) and takes account of repayments of awards recovered due to drop out etc.
4. Student Loans Company Administration - Scottish contribution to the running costs of the Student Loans Company for payment and collection of student loans.
5. Unwinding of Debt Sale Subsidy Provision - Maintenance of provisions made to service interest on the old mortgage-style student loans which were sold to banks in 1998 and 1999.
6. Cost of Student Loans - This represents the DEL cost of issuing student loans. It is largely made up of the RAB (Resource Accounting and Budgeting) charge (explained in more detail below) of 31% of all loans advanced. As well as the RAB charge, the costs of student loans contains provision to provide flexibility in the budget for any additional charges associated with loans that may arise throughout the year.
7. Unwinding of Discounts on Write-off Provision - Maintenance of provisions to account for inflation.
8. Student Loans Net New Lending ( AME) - This is the net effect of student loan lending considering the amount of loans paid out against loan repayments made each year. In 2008-09 this figure is made up with £180.3 million being paid out in loans netted against an assumed £56 million in loan repayments. Loan payments and repayments are attributed to the AME budget (explained below). There is a significant drop in loan spend between 2007-08 and 2008-09 due to three policy changes:
- The abolition of the Graduate Endowment means that £14 million is no longer required from 2008-09,
- Loan repayments are expected to increase by £10 million a year from 2008-09,
- The introduction of monthly loan payments increased loan spend on a one-off basis in 2007-08. As a result, there is a subsequent drop of £12 million annually.
9. Student Loan Interest Subsidy to Banks ( OTME) - Payments to service debt that has been sold. OTME is explained below.
The Scottish Budget
In considering how the different elements of this budget interact, it is important to understand the different classifications of Government expenditure and the balance of funding controlled by the Scottish Government compared to that controlled directly by HM Treasury.
The Departmental Expenditure Limit ( DEL) forms the majority of the Scottish Government's budget and is made up of operating and capital expenditure. DEL is set for three years during the Spending Review process.
Annually Managed Expenditure ( AME) is agreed with HM Treasury each year and contains those elements of expenditure that are not readily predictable, for example, NHS and teachers' pensions. Student loans are paid out of AME rather than DEL due to their demand-led nature. Repayments received are also applied to AME and the accumulated loan debt is accounted for by the Scottish Government.
Total Managed Expenditure ( TME) comprises the Departmental Expenditure Limit and Annually Managed Expenditure. Expenditure not classified as DEL or AME is said to be outside TME( OTME). The Student Loan Interest Subsidy to Banks in relation to debt sold is classified as an OTME transaction.
Implications for Loans
In practice, what this means is that the Scottish Government essentially only has control over spending through DEL. While student support policy is devolved, HM Treasury control AME budgets so that under current arrangements we would not be able to re-allocate existing AME expenditure ( i.e. student loans) to DEL expenditure ( i.e. grants), as a result of any policy changes in Scotland