Yahoo News Student loans must be added to deficit, Office for National Statistics says
Student loans must be added to the deficit, the Office for National Statistics has said, as almost eight in ten graduates never pay it back in full.
The new accounting system, which comes into force next autumn, will be a blow for the Treasury as it will leave a £12 billion hole in public finances, according to official forecasts.
The ONS will now split the loans into two parts - financial assets and government expenditure. It marks a break with the current system where student loans do not count as government spending, despite the fact that many graduates do not earn enough to re-pay the loan.
“The design of the system means much of this student loan debt will never be repaid, and is therefore written off by the government,” said David Bailey, head of public sector division at the ONS.
“Because of this, many people, including Parliamentary committees, have asked whether this means some, or all, of the money should be treated as government spending rather than government lending.”
Undergraduates can take out a loan of up to £9,250 to pay for tuition fees each year they study. This is re-paid each year as a proportion of their income after they graduate, but it is written off after 30 years if they have not repaid it in full.
Under the new system, 77.4 per cent of graduates will never fully repay their debts, compared to 41.5 per cent of graduates under the previous system, the report said. The IFS analysis found that the rise in tuition fees coupled with soaring interest rates - up to three per cent above inflation - means that higher earners could end up paying £40,000 in interest payments alone.
The re-classification of student loans means that this year's deficit, which the Office for Budget Responsibility (OBR) had recorded at £25.5 billion at the time of the Budget, will grow to around £37.5 billion.
According to the OBR’s latest forecast, only 38 per cent of interest charged to students will be repaid, meaning the remainder would likely be counted as government spending.
Jonathan Athow, ONS deputy national statistician for economic statistics, said: "To ensure our treatment of student loans better reflects the way the system works in practice, we will split the Government's student loan payments into a portion that will be repaid and is therefore genuine government lending and a portion that is not expected to be repaid, which will be treated as government spending.”
Last year Theresa May ordered a review of post-18 education led by Philip Augar, a former equities broker. The Prime Minister came under pressure on the issue after it was felt that Jeremy Corbyn's pledge to abolish tuition fees won support from young voters in last year's general election.
It is feared among universities that the ONS’ decision on student loans will pave the way for Mr Augar, who is due to report to ministers next month, to recommend more drastic changes such as slashing in tuition fees or capping student numbers.
Alistair Jarvis, chief executive of Universities UK, warned that taking these measures would risk “throwing the progress that government and universities have made on social mobility into reverse”.
He said: “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.
“That means avoiding kneejerk reactions to the ONS review which would reduce the amount universities receive per student or lead to fewer students being able to benefit from higher education.”
A Government spokesman said: "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."
