Student loans that are unlikely to be repaid will be seen as government spending, the statistics regulator announced, in a change which could significantly increase the UK’s deficit.
The decision means that an estimated 45% of student loans which are not expected to be paid back should be recorded as an expense.
The Office for National Statistics, which compiles public accounts, said estimates showed that the change would have added around £12 billion to the deficit this year.
It said that the decision would ensure that the way student loans are treated reflects how the system works in practice and how other countries treat similar loans.
Some £16.7 billion in loans were extended to UK and EU students by the Student Loans Company last year, with around 58% of these covering tuition fees, currently a maximum of £9,250 a year.
The government earns around £2.6 billion in interest each year from student loans.
But the Department for Education has estimated that approximately 45% of the most recent loans given to students in England will not be repaid in full.
The balance of most loans given to students is wiped after 25 to 30 years.
What has the ONS announced?
The ONS has said that the way it treats student loans the government does not expect to be repaid has changed.
Instead of treating all student loans as government lending, the ONS has said that, in future, it will split loans into two categories: those the government expects to be repaid; and those it does not.
The ONS will now treat loans the government does not expect to be repaid as government spending.
What does the change mean?
Essentially, the ONS’s decision means that, each year, a proportion of the amount the government lends to students will be treated like everyday spending.
It means that, despite the money being given as a “loan”, Whitehall bean counters do not expect to see the money again. Once it’s spent, it’s gone.
Currently, 45% of student loans given out in England are not expected to be paid back in full.
The decision will increase the spending deficit – which is calculated by subtracting the amount the government receives via taxes from the amount it spends on things like public services.
Had the change applied this year, the Office for Budget Responsibility said the deficit would have increased by £12 billion.
The ONS also confirmed that the change means that debt-write offs due to take place in 2040, for example, would be reflected as government spending today.
The amount the government lends to students through loans it expects to be repaid remains unchanged – and therefore continues to be classed as lending. Once it’s spent, ministers expect it to be paid back.
What is the impact?
The ONS says that the change to how some student loans are treated within public finances has “no direct policy consequences”.
But it concedes that, in reality, the change may encourage Whitehall to think differently about student loans – especially those which are unlikely to be paid back before being written off.
Ultimately, this statistical tinkering could now spark fresh debate over university tuition fees as a whole within government, and give renewed confidence to those who have argued for their abolition.
But experts have warned the decision could now lead to much more stringent repayment terms for graduates.
Nick Hillman, director of the Higher Education Policy Institute, said “students are likely to get hit because they suddenly look much more costly to current taxpayers”.
“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,” he added.
The government’s spending deficit was the defining political issue of the 2010-2015 coalition, and the Tory-Lib Dem government increasing tuition fees from a maximum of £3,290 to £9,000 in 2012 was one of its most controversial decisions.
What is the ONS saying about its decision?
ONS deputy national statistician for economic statistics, Jonathan Athow, said: “We produce national accounts, ensuring that government receipts and spending are properly recorded.
“To ensure our treatment of student loans better reflects the way the system works in practice we will split the government’s student loan payments into a portion that will be repaid and is therefore genuine government lending and a portion that is not expected to be repaid, which will be treated as government spending.
“When coming to this decision we consulted widely with many other countries and international bodies to ensure that our figures remain internationally comparable.”