To ask the Scottish Executive what effect changes to the interest rate and rate of inflation has on the “unwinding of discount on debt sale subsidy provision”, “cost of student loans”, “unwinding of discount on write-off provision” and “student loans interest subsidy to banks” budget lines.
Unwinding of Provisions:
Student loan provisions are created and supplemented on a discounted cost basis, and each year the discount in the provision is unwound. This means that the balance of the provision is uprated by that part of the discounting which relates to the year of account because the provision has moved on a year.
The unwinding element is obtained by calculation with reference to the Retail Price Index (RPI) and the discount rate. For student loans accounting purposes, the RPI used is the RPI in September in the accounting year; and the discount rate is the rate that equates to the Treasury''s cost of capital for provisions.
This being the case, any changes in interest rates will not affect the unwinding calculations unless the Treasury change their cost of capital for provisions. Changes in the rate of inflation will only affect the unwinding calculation to the extent of the change in September in the year of account since that is the index which is utilised, in accordance with the Financial Reporting and Expenditure Manual. The amount of the change will also be dependent on the amount of residual provision available to be unwound. Based on existing rates, the unwinding of discount on the write-off and debt sale subsidy provisions will be £23.8 million and £4.6 million respectively. This is in excess of budget by approximately £11.8 million and £0.6 million respectively and this additional cost will be met from within the Education and Lifelong Learning portfolio budgets.
Cost of Student Loans:
The cost of student loans is derived by application of the rate, currently 31%, determined by the student loans repayment model which incorporates long-term forecasts for both a discount factor and an RPI figure. Although these two elements are incorporated into the model on a long-term forecast basis, the cost of student loans rate is set for the Spending Review period, which is currently 2008-09 to 2010-11. Therefore, changes to the interest rate and rate of inflation will have no immediate effect on the cost of student loans for this spending review period.
These factors have no effect on the student loans advanced.