‘Could student loan changes be good news for FE?’

Reclassifying student loans will add £12bn to the UK deficit, but FE could be the beneficiary, writes Tom Richmond
17th December 2018, 12:58pm

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‘Could student loan changes be good news for FE?’

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‘Tis the season to be jolly! Unless, that is, you are a civil servant at the Treasury and checked your email at about 9.30am this morning.

The Office for National Statistics (ONS) has just announced a major change in the way that student loans are recorded in the national accounts and public sector finances. This is a perfect example of when the world of policy can be far from glamorous, but still hugely significant.

The scale of our student-loan system has reached eye-popping proportions. More than £16 billion is being loaned by the government (and, ultimately, taxpayers) to students each year.

Furthermore, the value of outstanding loans has already passed £100bn and by the middle of this century, the total amount of money owed by students will be approaching £500bn. The current situation is simply unsustainable.

In April 2018, the ONS said that it was going to review how student loans were treated in the government’s books. This was necessary for two reasons. Firstly, the student-loan system has grown rapidly in a very short space of time. Secondly, the method of recording student loans in government accounts is truly bizarre.

No more kicking the can down the road 

At present, the government does not include the money given to students each year in its “deficit” figures (ie, the amount borrowed in a single year) because it has previously claimed it was just a loan.

However, the government’s own calculations show that just 30 per cent of full-time undergraduates will ever fully pay back their loan, meaning that taxpayers will be forced to write off a huge proportion of the loans handed out.

Under the current system, the government essentially kicks the financial can down the road so that the write-off of student loans that never get repaid only gets recorded in the deficit figures when the loans hit their 30-year maturity.

The ONS has decided that this needs to change and instead wants any expenditure related to the cancellation of student loans to be accounted for when the loans are issued.

Not much Christmas cheer at the Treasury 

This shift in accounting practice, along with a change to the way that the interest on student-loan debt is handled, means that the government’s deficit for the financial year ending 2019 will rise by approximately £12bn. Not much Christmas cheer about that for Treasury civil servants.

The implications of this technical alteration in governmental accounting procedures are enormous. The ongoing Augar Review of post-18 education that is assessing the shape of the entire college, apprenticeship and university system will now carefully consider what this means for its own recommendations regarding the future of tertiary education.

Rather than seeing the extra £12bn as a problem, it potentially opens a fascinating and long-overdue conversation for the Augar Review and others about how and why the government invests in tertiary education.

What the decision by the ONS has done is bring a huge government subsidy to the student-loan system (which is almost entirely devoted to supporting universities) back into the government’s deficit figures.

Rise in college-based provision and apprenticeships?

This means that if the government wishes to reduce the deficit, it may well have to reduce the financial burdens created by the existing student-loan system.

Rumours emerging from the Augar Review suggest that it is considering some kind of cap on the number of students going to university, which is one way (albeit a highly controversial one) to keep a lid on the expansion of the loan system.

Encouraging more students to consider college-based provision and apprenticeships instead of full-time university degrees would be another route to achieving the same goal, and no doubt the Augar Review will be pondering how this might be achieved as well.

Even after the Augar Review sets out its plans for tertiary education in the New Year, the issue of how much taxpayers’ money is being invested in student loans will not go away.

Long-term planning vs short-term pressure

Ministers and officials must resist the temptation to immediately start hacking away at student-loan expenditure to bring down the deficit because this will almost certainly lead to bad policy solutions and poorer outcomes for students.

Instead, they should think hard about how much the government spends across the whole tertiary landscape and ask how this investment could be used to the greatest effect.

Let us hope that, for once, long-term planning triumphs over short-term pressures.

Tom Richmond is a former adviser to ministers at the Department for Education, and senior policy fellow at the Policy Exchange thinktank

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