February 15, 2011 12:02 am

Low interest rates sap student loan book value

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Graduates

Graduating worth: the business department is committed to producing options on selling the student loan book, but disposal will be complicated by the extreme volatility in its pricing

The student loan book has been marked down by £2.7bn as a consequence of the ultra-low interest rates being set by the Bank of England, government documents released on Monday reveal.

The figures emerged as the Treasury published the results of the “housekeeping” exercise it carries out annually on departmental spending, covering significant overruns, changes to accounts or new liabilities.

In total the Treasury listed more than £8bn of new spending in the “spring supplementary estimates”. Although officials are confident this will require no new borrowing, the documents published do not identify corresponding savings or underspends.

Other big financial changes included the Ministry of Defence writing off more than £16bn of kit and the Department of Health confirming that the upfront costs of coalition healthcare reforms could reach £1.8bn.

Some of the most commercially sensitive adjustments were with regard to the student loan book, which lost almost 10 per cent of its value “mainly” because of “the low level of interest rates which has prevailed since 2008”.

The business department is committed to producing options on selling the book, now valued at £21bn. The sale will be complicated by the extreme volatility in its pricing. Previous tranches were sold at large discounts.

Holders of student loans are charged interest on their outstanding balances at the rate of retail price inflation or Bank of England base rate plus one per cent, whichever is the lower. So when, as at present, the interest rate plus one is lower than the inflation rate, balances on the loan book shrink.

Retail price inflation is currently at 4.8 per cent and loan balances are being charged an interest rate of only 1.5 per cent.

Separately the MoD revealed that it had written down around £14bn of capital, mainly as a result of decisions in the defence review to scrap fighter jets, ships and tanks.

The figure is a notional Whitehall value and does not reflect the costs of buying the kit or its potential for resale. However, it does underline the changes triggered by the review. The MoD admitted it had permanently lost some £2.3bn of equipment – from Bowman radios and guns to spare parts for planes. Defence officials said some of the kit was probably still in use in Afghanistan and elsewhere, but was unaccounted for in inventory records.

These problems have prompted the National Audit Office to qualify the MoD accounts for the past two years.

The Department of Health included a £2.5bn adjustment to cover the costs of an overhaul of the National Health Service and other unrelated provisions.

Officials said some £1.8bn of this covered the highest estimate of redundancy and transition costs from staff transferring from the soon-to-be abolished primary care trusts to GP commissioning consortia – almost 2 per cent of the English NHS budget.

Another notable decision was the allocation of around £1bn to the Department for Work and Pensions to fund winter fuel payments should there be “sustained cold weather” through January and February. In the event, the contingency fund is unlikely to be drawn down.

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