Student loan strains

Changes in the way student loans are accounted for could have a considerable impact on how higher education is funded in the future, says CASSL’s William Hughes.

February 2019

For many years, economists have argued that the treatment of student loans provides a warped view of government debt and expenditure as many of these loans are eventually written off. In response, the Office for National Statistics has altered the way that student loans are accounted for.

So, what is this change and will the change impact how student loans are provided in the future?

The Change 

Currently the UK government recognises student loans against national debt with any receipts including interest offsetting losses on government borrowing (the current year government expenditure). As student loans have specific terms (repayments once annual earnings exceed £25,000, loans written off after 30 years) many loans are expected to never be repaid.

The Office for Budget Responsibility estimates that only 38% of loans currently on the books will ever be repaid, a hefty sum considering the current position is over £100bn.

The change will see the loans split upon creation, with the portion that is expected to be paid back remaining on the government ‘balance sheet’ and the portion that isn’t being included in government expenditure. Essentially the change will recognise the cost of the loans to the government in the short term instead of delaying the impact for 30 years.

The Impact

The Financial Times states the change would have increased public sector net borrowing to £52.1bn instead of £39.8bn for the budgetary year 2017/18. As public borrowing statistics are prevalent in many budgets the knock-on impact of this could be great.

Critics have argued that the change could incentivise the government to limit student loans in the future as they will have a greater short-term effect on the government’s reported expenditure and borrowing.

Martin Wheatcroft, an adviser to the ICAEW told BBC’s Reality Check: “A change would probably affect the way the Treasury sees student loans, perhaps causing it to impose more constraints on how much universities can charge in fees and how many students are eligible for loans.”

This shift does pose speculation about how policy change may shape the future of the higher education system. Will future changes lead to greater levels of funding? Or will future changes impact current loan balances?

For more information review the update by the ONS and keep following the story in the news.

William Hughes is chair of CASSL, the chartered accountants student society in London.

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