Philip Hammond is facing a £12bn hole in the public finances this year after changes to the way student loans are treated on the government’s books, reflecting that many will never be repaid.

In a stroke of the pen from the Office for National Statistics, student loans will now be treated as part financial asset in the national accounts, because some will be repaid, while part will be classified as government expenditure, as some loans will never be paid back in full.

It said it would result in the budget deficit – the annual gap between government income and expenditure – increasing by about 0.6 percentage points of GDP a year, which equates to about £12bn in the current financial year.

The changes are bad news for the chancellor because they wipe out all of the windfall from a better performance in the public finances this year handed to him by the Office for Budget Responsibility.

It could also have significant implications for the review of university funding in England led by Philip Augar, which is due to report early in the new year and is considering whether to cut tuition fees from £9,250 per year.

Hammond was warned by the Institute for Fiscal Studies during the autumn budget that he had gambled with the UK’s public finances, with the influential tax and spending thinktank suggesting the windfall could quickly be reversed.

The switch from the ONS reflects the fact that wholesale changes have been made to university finance in recent years, including the vast expansion of tuition fees and higher repayment thresholds for students once they begin earning. The total value of student debt has ballooned in recent years as a consequence.

For students who started university after 2012, any amount they are unable to repay 30 years from the first April after their graduation will be wiped by the state, meaning the government faces a serious problem in later years.

For this reason, student loans should not be treated by accountants like traditional loans, the ONS ruled. It said it would fully implement the decision in the government’s accounts next autumn.

The ONS decision rang instant alarm bells in the higher education sector. Universities UK, which represents 137 institutions, warned the government against any knee-jerk reaction that could result in cuts to funding per student or the restoration of a student numbers cap, throwing progress made on social mobility into reverse.

“At a time when demand for highly skilled graduates is growing, it is essential that universities are properly and sustainably funded to ensure students receive the high quality university experience they rightly expect,” said Alistair Jarvis, the chief executive of Universities UK.

Dr Tim Bradshaw, the chief executive of the Russell Group of leading research universities, said good policy should not be dictated by accounting rules. “If this change results in a cut to university funding then it will be students who suffer.”

The changes are likely to be significant for the public finances in the run-up to Brexit because the chancellor has earmarked additional government borrowing in reserve to handle a damaging no-deal scenario.

Analysis from the Resolution Foundation thinktank estimates that the overall impact from the latest changes will add about £72bn to government borrowing by 2022-23.

A government spokesman said it was “getting the national debt falling”, while adding: “This is a technical accounting decision by the independent ONS. It does not affect students, who can still access loans to help with tuition fees and the cost of living, and which they will only start repaying when they are earning above £25,000.”

Angela Rayner, Labour’s shadow education secretary, urged the government to reassure students and universities that they would not be adversely affected. “With a potential £12bn hit to the deficit coming it is time for ministers to be honest with the public and tell them how they will meet the cost of funding higher education.”

Nick Hillman, director of the Higher Education Policy Institute who was special adviser to the government when £9,000 tuition fees and income contingent loans were introduced in 2012, admitted the “180-degree flip” by the ONS might seem embarrassing for policymakers

He cautioned however: “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.”