Student loan shake-up creates £12bn black hole

A change in how student loans are treated on the government’s books is set to create a £12 billion black hole in the public finances at the stroke of a pen.

As of next year, the Office for National Statistics will class student loans as part financial asset, while the rest will be treated as government expenditure given some loans will never be paid back in full.

The Daily Mirror says this basically means “the government has been told it has to turn £12 billion worth of student loans from 'debt' into 'spending' – effectively admitting they're grants”.

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“It is a landmark shift from the current system where loans do not count as government spending while interest payments are counted as income - even though many graduates will never pay all the interest back as they do not earn enough to do so,” says Sky News.

Eight in 10 graduates will never repay their student loan in full, instead seeing their debt wiped after 30 years.

The Guardian says “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 might sound like a technical change - but it has major implications for the level of tuition fees in England,” says the BBC.

“The decision by the ONS will provide a juicy carrot for the government to lower fees from £9,250 - because under the accounting changes, the higher the level of fees, the higher the lending and the greater the negative impact on the deficit,” says the broadcaster.

A review of university funding in England led by Philip Augar is due to report early in the new year and is considering whether to cut tuition fees.

According to the Institute for Fiscal Studies think tank, if the government does nothing - and sticks with the current level of fees - the damage to the deficit will rise from £12bn at present to £17bn in five years.

However, Nick Hillman, director of the Higher Education Policy Institute think tank, warned that students could ultimately suffer from the ONS decision because they look more costly to 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 told The Independent.

Tim Bradshaw, chief executive of the Russell Group of the UK’s most prestigious universities agrees:

“Ministers may now be tempted to cut university funding because it will look better for the deficit, but good policy shouldn’t be dictated by accounting rules. Universities should be funded sustainably because of the vast social and economic benefits they bring. If this change results in a cut to university funding then it will be students who suffer.”