Student Loans Scheme By Ian Collins and Robbie Batley PwC 1 - - PowerPoint PPT Presentation

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Student Loans Scheme By Ian Collins and Robbie Batley PwC 1 - - PowerPoint PPT Presentation

Sep 23, 2022 208 likes •363 views

Valuation of the Student Loans Scheme By Ian Collins and Robbie Batley PwC 1 Agenda 1. The valuation 2. Projecting repayments 3. Student loan model 4. Modelling techniques 5. Challenges 6. Results 7. Cohort analyses 8. Impact of GFC on

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Valuation of the Student Loans Scheme

By Ian Collins and Robbie Batley

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Agenda

  • 1. The valuation
  • 2. Projecting repayments
  • 3. Student loan model
  • 4. Modelling techniques
  • 5. Challenges
  • 6. Results
  • 7. Cohort analyses
  • 8. Impact of GFC on students

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The valuation

  • The Crown lends money to students
  • Inland Revenue (IR) collects the repayments
  • The loans are assets in the Crown’s accounts
  • The Crown must report the value of these loans

when preparing its financial statements

  • Hence, a valuation of these loans is needed
  • Future repayments are projected and discounted to

determine their value

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Projecting repayments

  • Annual repayment obligations:

– If living in New Zealand: – If living overseas:

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Outstanding balance Repayment obligation < $1,000 Outstanding balance $1,000 - $15,000 $1,000 $15,000 - $30,000 $2,000 $30,000 - $45,000 $3,000 $45,000 - $60,000 $4,000 $60,000+ $5,000

Obligation = 12% × max(0, Income - $19,084)

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Projecting repayments

  • Consider a typical student:

– John Smith starts uni aged 18 – Works part-time while studying – Completes his degree in 3 years – Goes overseas for 1 year (OE) – Comes back home – Gets a job – Eventually pays off his loan

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Projecting repayments

  • What will John’s repayments look like?

Little to no repayments (not earning much) Depends largely on John’s attitude towards repaying his loan Probably no repayments until he gets a job 12% of his income that is above $19,084

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Studying Overseas Back in NZ but not working yet Working in NZ

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PwC 7 Opening balance State transition model Income models Payment models Income Obligation Payments Obligation Payments Payment models Balance before interest and w/o’s Closing balance Interest (if overseas) Write offs

Balances Sub-models Calculations

Key

NPV of cash flows = value of student loan debt If NZ state…

Student loan model

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PwC 8 N0: 78% Yes: 22% Rule 1: Income < $25,000 Terminal node 1: N0: 90% Yes: 10% N0: 88% Yes: 12% Rule 2: Total paid last year < $1 N0: 67% Yes: 33% Rule 3: Income < $50,000 N0: 62% Yes: 38% Rule 6: Years since last employed < 0.5 N0: 76% Yes: 24% Rule 7: Tax type = IR3 (self employed) N0: 92% Yes: 8% Rule 4: State last year = study or overseas N0: 65% Yes: 35% Rule 5: Income < $5,000 Terminal node 2: N0: 82% Yes: 18% Terminal node 99: N0: 67% Yes: 33% Terminal node 100: N0: 85% Yes: 15%

Key

Rule node Output node

Modelling techniques - CART

Example: Probability of making a voluntary repayment

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Modelling techniques - GLM

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0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 1 - 3 certificates 4 certificates 5 - 7 certificates Bachelors Postgraduate

Probability of making a repayment Qualification (QACC code)

Actual Data GLM Projections 40% 50% 60% 70% 80% 90% 100% 1 2 3 4 5 6 7 8 9 10 11

Probability of making a repayment next year Number of consecutive repayments

Actual Data GLM Projections

  • Example: Probably of making a payment when overseas

ln 𝑞 1 − 𝑞 = 𝛾0 + 𝛾1𝑌1 + 𝛾2𝑌2 + … Qualification type Repayment history

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Challenges

  • Dealing with scheme rule/policy changes
  • Environmental impacts on students, such as the Global Financial Crisis
  • Missing data
  • Data lags – income data incomplete in the latest year
  • Natural censoring (we only consider those with loans)
  • Wage inflation for student loan borrowers
  • Death and bankruptcy rates
  • Modelling techniques (eg CART, GLM, empirical distribution)
  • Interactions between sub-models

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Results

Projected repayments: Total debt (30 June 2015) Value of debt = $14.8 billion = $8.9 billion

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$0m $200m $400m $600m $800m $1,000m $1,200m $1,400m 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

Year ending 30 June Actual 30 June 2015

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Cohort analyses

  • Bachelors and

post-graduates have better repayment prospects

  • The longer a

borrower spends earning below $20k, the worse their repayment prospects become

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0% 20% 40% 60% 80% 100% $0 $1b $2b $3b $4b $5b $6b $7b $8b

Level 1-3 certs Level 4 certs Level 5-7 certs Bachelors Post-graduate

Qualification type

Value of debt Total debt Ratio (value/total) 0% 20% 40% 60% 80% 100% $0 $0.5b $1.0b $1.5b $2.0b $2.5b $3.0b $3.5b

None 1 year 2 years 3 years 4 years 5+ years

Years earning below $20k (NZ borrowers not studying)

Value of debt Total debt Ratio (value/total)

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Impact of GFC on students

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GFC

Pre-GFC GFC Post-GFC

  • The GFC significantly hurt young people
  • A few found jobs and came through it OK
  • Others were not so lucky

?

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Impact of GFC on students

  • The probability of earning more

than $20k the year after study dropped

  • The impact was less severe
  • n those studying towards a

Bachelors or higher

  • The GFC has made it

harder to break out of a low income (below $20k) and earn a higher income

  • Students are getting

stuck on low incomes

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G F C G F C

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Any questions?

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