Possible decision by ONS would reopen question of funding of students in England

The government faces an extra £10bn being added to its borrowing as the result of a radical shake-up in the accounting for student loans, with experts warning of increased uncertainty over the outlook for university funding.

The Office for National Statistics is due to announce its plans to change provisions for student loans in the UK’s national accounts, with any change likely to affect the government’s public sector deficit policies and throw open questions about how students in England are funded.

Student loan shake-up puts £12bn hole in public finances Read more

The ONS’s decision has already disrupted a review of tertiary funding, announced by Theresa May earlier this year, with the review’s chair Philip Augar delaying its report until next year because of the potential implications.

Gavan Conlon, a partner at London Economics who has analysed the issue, said the outcome was likely to reduce the chances of major changes to the current system, because policymakers would be more constrained by the government’s finances.

“The issue here is that the government has a deficit target, and whatever the ONS decides to do, that will affect the deficit,” Conlon said.

“The Augar review might find that it significantly reduces the probability of the return of maintenance grants, which would be very detrimental for the very poorest students who leave university with the largest debts.”

The ONS currently accounts for student loans in the same way as commercial loans, as a financial asset that produces a revenue stream of repayments. But student loans are not like mortgages in some crucial respects: repayments are contingent on a graduate’s income being above £25,000, and after 30 years the remaining principal and interest are written off.

The Department for Education estimates that 45% of the value of loans to undergraduates will not be repaid. Outstanding loans to students in England totalled more than £100bn this year, with £15bn borrowed last year alone. By 2022-23 annual loans are forecast to rise to £20bn.

The loans for tuition and maintenance are not included in the Treasury’s public sector net borrowing, yet the interest accruing on those loans is counted as revenue, which flatters the government’s borrowing figures and creates a “fiscal illusion,” according to the Office for Budget Responsibility.

But now the ONS wants to puncture that illusion by accounting for the real impact on the national accounts rather than waiting three decades.

In the most extreme option, the full amount of the government’s student loans would be accounted for immediately, adding £16bn to annual net borrowing at a stroke. But experts say the most likely option for the ONS will be to record the loan repayments in the national accounts when they take place, which the ONS says would avoid the distortions of the current system, with its boom and bust effect.

Even that more modest accounting change is likely to add between £8bn to £10bn to public sector net borrowing each year.

Andy Westwood, a professor of government practice at the University of Manchester, said the change would force the government to think about new ways of financing higher education, unhampered by the constraints of the existing loan system.

“When the Augar commission was created it was given tight terms of reference – its recommendations had to be consistent with current policies. That could all change,” said Westwood.

“It opens the door to thinking about restoring teaching grants and restoring support grants for students from disadvantaged backgrounds, fixing part-time study, and if Augar was considering lower tuition fees then now he could do it. Or even support for students who don’t get anything at the moment, such as apprentices.

“It opens up serious options in those spaces. It makes the government’s subsidy for higher education more obvious, and it allows ministers to say, do we want the subsidy to work in that way?”

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But accounting for the government’s real cost of higher education, rather than hiding it behind a charge on the exchequer in 30 years’ time, also brings the danger of having to compete for funding with other sectors, according to Nick Hillman, the director of the Higher Education Policy Institute.

As a special adviser to the government at the time that £9,000 tuition fees and income-contingent loans were introduced in 2012, Hillman said it worked very well in shielding universities from the effects of austerity.

“There was a reason we did what we did, because we wanted to protect universities from the cuts seen everywhere else. My worry is that now higher education could come up against politicians’ desire to deliver tax cuts or pay for the NHS before the next election,” Hillman said.

• The headline on this story was changed on 17 December 2018. It originally referred to the potential for national debt rising by £10bn. This should have read deficit, not debt, and has now been corrected