Changes to the accounting treatment of student loans in the UK could transform higher education policymaking, potentially making the Labour Party’s plan to abolish tuition fees in England seem “a lot less expensive”, and bringing far greater Treasury scrutiny of “who’s going to university and what courses they are doing”.
A decision by the Office for National Statistics to treat student loan write-offs as government spending, rather than lending, “will suddenly bring all the long-run costs of student loans to the very forefront of policymaking”, said Jack Britton, a senior research economist at the Institute for Fiscal Studies.
The ONS decision unravels an accounting system that meant student loans did not add to the deficit at all when they were issued – and thus unravels the logic driving sector policymaking since the trebling of tuition fees in 2012. The decision, which would add £12 billion to the deficit in the current year, also has major implications for the government’s ongoing review of post-18 education led by Philip Augar, delayed to take account of the ONS’ decision, as well as the government’s wider aim to eliminate the deficit.
Gordon Marsden, Labour’s shadow higher education minister, said that the ONS decision “finally exposes the sort of statistical con trick” that former chancellor George Osborne and other ministers “perpetuated when tuition fees were trebled” in England under the Conservative-led coalition government in 2012.
And it “immeasurably strengthens the case” for Labour’s policy of “moving away from loans and moving back to grants”, he added.
Labour’s policy to abolish fees in England had been costed at about £11 billion, in comparison with the £9,250 system under the status quo accounting treatment. But the relative cost of Labour’s policy could now be more than halved by the ONS decision, some suggest.
The ONS mounted a review of the treatment of student loans in government accounts after two parliamentary committees raised concerns about “fiscal illusions” created by the current system.
Under the system the ONS has chosen, scheduled for implementation in government accounts in autumn 2019, the portion of the loan outlay that the government does not expect to be repaid will be recorded as spending, adding to the deficit. The remainder of the outlay will be classed as loans.
The IFS’ Dr Britton told Times Higher Education: “A lot of the policy changes that have happened since 2011 have, I think, been influenced by the fact that student loan write-offs don’t count until 30 years down the line, in terms of the deficit.”
He highlighted not just the trebling of fees but the abolition of maintenance grants, replaced by loans in 2016.
But after the ONS decision, “replacing loans that the government expects to write off anyway with grants becomes very appealing”, he added.
The IFS says in its published verdict on the ONS decision that it now becomes “superficially more attractive to reduce fees or abolish them altogether (as Labour proposed in its 2017 general election manifesto)…or to restrict student numbers”.
Dr Britton said of Labour’s fees pledge that “suddenly that policy is a hell of a lot less expensive”.
But he also said: “More generally, the Treasury is going to be putting the sector under a lot more scrutiny than they were before.”
The “removal of student number caps” and the absence of “regulation on who universities can admit” have “been allowed because of the relatively loose accounting treatment” on higher education funding, Dr Britton argued.
“Now that adding more students will add more cost to the deficit, I think the Treasury is going to be looking more closely at who’s going to university and what courses they are doing,” he continued.
The fact that the portion of loans not repaid by graduates now adds to the deficit would mean that data on graduate earnings by subject and university, on which the IFS has been working, are “going to get a lot more scrutiny”, he added.
On more immediate potential impact, Andy Westwood, professor of government practice at the University of Manchester, said: “In one bound, Augar is a little bit more free…The current system now appears much more expensive in the short term and about as expensive as other options he will have been mulling over – including various grants for part-time [study] and Level 4 and 5 [below degree level].”
But he cautioned that the change will “also bring pressures to bring the deficit impact down” and the review “might be pressured into reducing [loan repayment] thresholds and extending repayment terms as well as cutting fees”.