A change to how student loans are recorded in public finances will add £12 billion to the national deficit this year.

The Office for National Statistics (ONS) has been looking at how student loans should be treated in government finances. At present, they are classed as government lending. However, as around 45 per cent of the lending is not expected to be repaid and is written off by the government, parliamentary committees have asked when some or all of the money should be treated as government spending instead of lending.

David Bailey, head of the ONS’ public sector division, said:  “To ensure our treatment of student loans reflects the way the system works in practice we have decided to split the government’s student loan payments into a portion that is genuine government lending and a portion that is government spending.

Costly changes for government

“The lending element will be calculated based on expected future repayments. The remainder, which is not expected to be repaid, will be treated as government spending.

“This will be treated as capital spending, as this can be thought of as the government effectively cancelling a portion of the loan at issuance, which is treated as capital spending under international standards.”

The Office for Budget Responsibility has estimated that the new approach will lead to the deficit being increased by 0.6 percentage points of GDP a year, which equates to around £12 billion in the current year.

The move will have a significant impact on the government’s review of post-18 education, which is expected to be published in the new year. The review will look at both higher and further education.

Creating a ‘black hole’

Gordon Marsden, shadow higher and further education minister, said the announcement represents a “black hole” in the government finances that will only get bigger.

He added: “This justifies everything that the Institute for Fiscal Studies and other bodies have said about the lack of viability in the current system. The government will have to find this extra money and it may force them to thinking about imposing controls on numbers.

“This only strengthens Labour’s case for getting rid of a loans-based systems.”

‘Embarassing’ for officials

Nick Hillman, director of the Higher Education Policy Institute, said: “The 180-degree flip by the Office for National Statistics may seem embarrassing for policymakers but it is more embarrassing for the official accountants, who are changing how they regard investment in higher-level skills.

“The ONS will move on and the politicians will fall in line. Meanwhile, students are likely to get hit because they suddenly look much more costly to current taxpayers, while the extra income tax they will pay as graduates in the future continues to be ignored. Unless we are careful, we are at risk of sleepwalking into a triple whammy of fewer university places, less funding per student and tougher student loan repayment terms.”

The University and College Union’s head of policy and campaigns, Matt Waddup, said: “Successive governments’ funding reforms have done nothing but raise fees and student debt. It’s crucial that any future changes don’t reduce university funding or lock potential students out of learning. What we need is a new approach which recognises that higher education is a public good and should be funded through taxation, including an increased contribution from business.”

Not relying on ‘smoke and mirrors’

Julian Gravatt, deputy chief executive at the Association of Colleges said the upcoming Treasury spending review will be a good time for the government to adjust its priorities - when the accounting reclassification will kick in - as the current system “is weighted heavily towards full-time residential higher education”. 

He added: “The way in which government accounted for student loans didn’t look right so at first glance ONS’s proposals look sensible. The size of the accounting change should give pause for thought. The DfE’s accounts will be restated by around £12 billion a year which is more than DfE currently spends on college and school sixth forms, apprenticeships and adult education combined.”

Amatey Doku, vice president for HE at the NUS students’ union said it is right that the government coffers rightly identify the cost of funding universities and colleges as “it’s important not to rely on smoke and mirrors”.

He added: “The previous treatment distorted public policy and made substantial student loan debt appear much more attractive to the Treasury than direct grant funding. This is an opportunity to address that distortion both for student maintenance grants and teaching grants to institutions. However, what has not changed is the need to invest in further and higher education in this country. The decision cannot be a reason to cut funding for these institutions or to students, whether in England or the rest of the UK, as it’s poorer students who would suffer.

“The review of post-18 education and funding under Philip Augar must now recommend strong public investment to fund universities and colleges and use progressive taxation to achieve this.”