Cost Of Unpaid Student Loans 'Could Blow £12bn Hole In Government's Brexit War Chest'

Experts warn amount of cash earmarked to minimise impact of EU exit could be halved.
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Unpaid student loans threaten to blow a £12billion hole in the chancellor’s Brexit ‘war chest’, according to data buried in an analysis of this week’s spring statement. 

Philip Hammond boasted on Wednesday he had £26.6bn of borrowing power as public debt was falling sustainably “for the first time in a generation”.

As Brexit nears, hopes were high he would use it to make good on Theresa May’s pledge to end austerity and fund tax cuts and spending increases in the autumn.

But planned changes by the Official for National Statistics to how student loans are accounted – they could soon be treated partly as grants, meaning they will only be partially repaid – could blast a huge dent in public debt and almost halve the “headroom” set aside to minimise Brexit’s impact.  

The independent Office for Budget Responsibility (OBR) modelled the shake-up and left footnotes on the looming changes its spring statement report. 

It found the move will add £12bn to the deficit by the mid 2020s, as almost two thirds of student loans taken out in 2018 could be written off. 

“We estimate (treating loans partly as grants) could increase the structural budget deficit by around £12bn or 0.5% of gross domestic product in 2020-21,” the OBR said.

It added: “This would absorb almost half the government’s current headroom of 1.2% of GDP against the fiscal mandate, as well as making a balanced budget harder to achieve.”   

Shadow education secretary Angela Rayner said ministers had failed to be transparent with the public about the true cost of the system.

But the Treasury said government finances had “more than enough capacity to absorb” the £12bn, and Hammond would still have £15bn headroom to deal with extra pressures arising after the UK’s EU departure. 

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Shadow education secretary Angela Rayner
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The OBR criticised ministers’ treatment of student loans, claiming they “flatter the headline net debt measure” and create “fiscal illusions”. 

In another worrying sign, the OBR noted independent research concluding that just17% of students who paid higher tuition fees since 2012 will ever repay their loans in full.

Angela Rayner, shadow education secretary, said ministers “have not been honest with taxpayers about the cost of the system”.

She told HuffPost UK: “The fact that over 60% of loans will be written off shows the extent of the cost to taxpayers, and is a stark reminder that the Tories’ system of student finance is simply not sustainable.

“The fiscal illusion at the heart of the system simply pushes the cost down the road. The Tories’ student loans are leaving graduates with huge debts that many will never repay in full.” 

The Office for National Statistics is due to issue new guidance on accounting for student loans this year. The OBR has modelled early versions of their methodology.

A Treasury spokeswoman said: “We have £26.6bn headroom against our borrowing target, which is £15bn higher than the OBR’s latest estimate of the impact of student loans.

“We have more than enough capacity to absorb the reclassification when it is finalised.”