ANNEX B
COST OF STUDENT LOANS
There are a number of costs to the DEL budget associated with student loans, the main one being the cost of student loans (line 6 in table 6). The most significant part of this cost is often referred to as the RAB (Resource Accounting and Budgeting) charge.
The RAB charge is an estimate of the percentage of the face value of loans issued in a given year which reflects the resource cost over the expected life of the loan to the government of making the loans. The charge is made up of:
- the face value of loans issued that are not expected to be repaid due to low income, death of the borrower, etc; and
- the net present value of the interest subsidy on loans. Interest on student loans is subsidised by Government so that the value of loan debt only increases by the rate of inflation.
For the current spending review period, the RAB charge is set at 31% in Scotland, so every £1 of loan paid out should cost us 31p. In addition to this charge, the cost of student loans also contains provision which allow flexibility in the budget to meet any unexpected pressures in relation to loans which may arise throughout the year. Of this 31% roughly 12% is applied to write-off of loans and around 19% to the interest subsidy. As set out above, the cost of student loans budget is set at £71.4 million in 2008-09 and is accounted for in DEL in the year the loans are paid out.
However, as shown in table 7 (below), the cost of student loans is not the only cost in the DEL budget which relates to student loans. Other loan costs in the 2008-09 Budget are:
- £5.3 million - running costs for the Student Loans Company
- £16 million - unwinding provisions to subsidise interest on the loan debt and the debt sold to banks.
When added to the cost of student loans this means that there is £92.7 million allocated from DEL in 2008-09 to support the payment of £180.3 million of loans and manage the outstanding loan debt. Across DEL and AME in 2008-09, when repayments are taken into account, the total budget allocation was £217 million including £180.3 million advanced in loans.
Table 7
£m
Loans paid out ( AME) | 180.3 |
|---|
Loan Repayments ( AME) | -56.0 |
|---|
Total cost of loans ( DEL) | 92.7 |
|---|
Cost of Student Loans | 71.4 |
|---|
Student Loans Company Administration | 5.3 |
|---|
Unwinding of Debt Sale Subsidy Provision | 4.0 |
|---|
Unwinding of Discounts on Write-off Provision | 12.0 |
|---|
DEL budget as % of (gross) loans issued budget | 51% |
|---|
Total (net) budget ( DEL and AME) | 217.0 |
|---|
Source: Scottish Government
Variable Costs
DEL costs relating to loans can be split into two categories - those tied to the payment of loans, which are variable, and those associated with the loan debt, which are fixed. Referring to table 7 the cost of student loans is variable and is directly linked to the payment of loans. If we were to stop paying maintenance loans completely then this cost would be almost completely reduced to zero. The variable cost of student loans for 2008/09 is budgeted to be £71.4 million
Fixed Costs
The fixed costs relate to the servicing of the loan debt. Running costs for the Student Loans Company (currently £5.3 million) may reduce slightly if no loans are being paid, but the most cost-intensive part of their operation is around collections, so while the loan debt remains, there is only potential for marginal savings on the SLC running costs.
Similarly, the unwinding of discount on write-off provision (£12 million) will also remain, while we have a loan debt to service. If the loan debt was to be reduced or removed then we would expect these costs to reduce, or no longer be required. The other unwinding provision for the debt sale subsidy (£4 million) will also continue to be required unless the loan debt previously sold to banks is paid off.
This gives an overall fixed budget of £21.3 million.