The Great Student Loans Swindle. It’s a Swindle. A Swindle.

I’ve had a few people suggest that I should write a blog on the economics of Higher Education, and the impact of University expansion.  I am guessing that this reflects the age of my readership – our children are filling in UCAS forms, and buying IKEA starter sets of crockery in preparation of moving out of the family home.

Each person suggested a different aspect that they wanted to read about.   Impact on the housing market, student poverty, prostitution.

Yes, prostitution.

I’m going to disappoint most people by instead focussing on the weird and wonderful world of student loans accounting, specifically how the Government accounts for student loans in the public finances.

This is without doubt the strangest bit of public finance I have ever encountered.   Something beyond even the Child Support Agency’s ever lasting debt pile, or the plans for Universal Credit.

Before we go any further here are some basic concepts about public finance.  I’ve put them in a special text so if you feel that we have gone over this before you can skip it:

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If you think that the difference between debt and deficit is boring in a few weeks time I will try and explain the difference between the Annually Managed Expenditure spend and the Departmental Expenditure Limit.

I was the first generation of student loans.  We still had maintenance grants, and no tuition fees, so the loan was a small proportion over-all.   The Governments decision to nationalise my over-draft was an unexpected socialist triumph in an otherwise bleakly Thatcherite era.  I drank the lot in the Cambridge pub.

Before the introduction of student loans all of the spending on Higher Education, grants, tuition costs, etc. was funded out the budget agreed by Parliament for the Department for Education (the Departmental Expenditure Limit).   As the Government was running a deficit at the time the cost of my student grant and the costs of teaching me counted towards the deficit, and added to Government debt.

The loan bit was different.   Because it was a loan it was classed as a financial instrument, so it didn’t count as government spending, or count towards the deficit, but it did count towards the pile of Government debt.  The expectation was that this loan would be repaid in full, and the only time at which the loan impacted on Government spending (and the deficit) was if the loan was defaulted on.

Due to these rules, there is no impact on the deficit when student loans are issued. If the Government gave grants to cover this spending it would count towards the deficit, but because they are loans they don’t count.

This might sound weird, and a bit of a scam, but the national accounts of the UK are compiled to international standards. These accounting standards are very clear on the treatment of loans and the Government is accounting for them correctly.

Let’s just go over that one more time to be really clear:

Student loans don’t count against Government spending and therefore don’t count against any deficit the Government is running, but they do count as Government debt.  

Unless they are defaulted on, in which case the default counts towards the deficit.  As they are repaid Government debt falls.

While I was drinking in the Cambridge the Student Loans company  was set up as a Non-Departmental Public Body to oversee the system.  In 1990, the year I got my loan it lent an average of £380 to 180,000 students, a total of £684m.  This was a drop in the ocean of Government spending, but at the time the then Conservative Government was running a deficit, and the shift of £0.6bn off the books helped make the numbers look a little better.

The value of these loans crept up over the 1990s, and when Labour got back into power the annual value was just under £1bn.  The departing Tory Government left behind the Dearing review which recommended changes to HE funding.  

The incoming Labour Government wanted to expand HE, but at the same time wanted to keep a tight grip on Government spending.   The result was the  1998 Teaching and Education Act, which introduced Tuition Fees and replaced maintenance grants with loans for all but the poorest students.  The amount loaned increased to £1.3bn.

The 2004 Act increased tuitions fees to £3000 a year, and by 2005/06 the amount loaned was £2.79bn.

None of this mattered from the debt/deficit perspective, because the Labour Government was running a primary budget surplus.   It mattered a lot to people borrowing the money, but didn’t impact on the deficit, because there was no deficit.

Lets just bask for a moment in those halcyon days of a Government with a primary budget surplus and no deficit. 

Things changed after the credit crunch and Peter Mandelson, restored to Government after more scandals than anyone can remember, commissioned the Browne review into HE spending.

I found this great quote about the Browne review from Wes Streeting, then President of the NUS, and now one of my favourite Labour back bench irritants:

“there is a real danger that this review will pave the way for higher fees and a market in prices that would see poorer students priced out of more prestigious universities and other students and universities consigned to the ‘bargain basement’”

Smart chap Wes.

The 2010 Coalition Government entered power with a big pile of ambition, a smaller pile of talent, and no plans worth speaking about.  After 13 years in the political wilderness you would have expected the Tories to come back into power with a pile of polices all neatly assembled in ring binders, with coloured post-its on the best bits, but all they had was an book David Cameron had bought at an airport about nudge theory, and some stuff Michael Gove had written for The Times about stuff.

When it was clear that the policy cupboard was bare a whole lot of old Labour policies discarded by Gordon Brown as too expensive or too crazy were dragged out from behind the filing cabinet by Senior Civil Servants desperate to feed any policies at all to the random assortment of Ministers and Special Political Advisors who they now had to work with.   

Do you remember John Selwyn Gummer feeding an unhappy child a greasy burger in order to prove that the BSE crisis was some awful rumour whipped up ghastly lefties?  She  ended up as the SPAd who signed off Universal Credits, the Caravan Tax, and the Pasty Tax. 

The Browne review was voted through Parliament in December 2010. People had hoped that Vince Cable, once a liberal hero with a fedora hat, would stop this, but he was too busy with the Christmas edition of Strictly Come Dancing.

There were riots in the streets, and an unsuccessful judicial review, but the deal was done. Tuition fees went up to £9000 a year.  Students who weren’t rich enough to pay these fees were forced to borrow to fund their education.

This meant that the total amount loaned by the SLC took a huge leap upwards.  In their most recent set of accounts the Student Loans Company loaned £18bn.  That is a massive shift.  To give you a comparator the capital budget for the NHS is £6bn this year.   The current UK budget deficit is roughly £40bn.

This means that pretty much the entire UK HE budget is now accounted for as loans rather than Government spending.  It counts towards debt, but not deficits, in an era where the deficit is the most controversial part of public spending.  This is a huge story which no-one really understands.   

There is so much complexity in Government finance that it is hard to get a grip on how much of George Osborn’s deficit reduction was due to the 2010 vote on tuition fees, but my guess is that if we returned to a world of grants and tuition fees the deficit would go up by about 50%.

This is bad.But it’s not the end of it.

Student loans are very different to a normal loan, which is repaid come what may.  Student Loans are conditional – that is they are only repaid under certain circumstances, and as the size of the loan has gone up Parliament has added lots of conditions to the repayment terms.   A number of people I know who have these loans believe that they will never repay them in their working life. 

As we discovered earlier if the loan isn’t repaid in the year in which it is due then this difference is counted towards the deficit.  Because the default rate is getting higher this means that the deficit will be higher decades into the future because of the high default rate on the loans.  The value of the assets as they sit on the Governments books is almost certainly a lot less than currently shown, and the future cash flows expected from them will be lower too.  The deficit will be higher in the future as the rate of repayments falls.

There is, however a way that this future negative impact can be removed.  National Accounts accounting rules stipulate that if student loans are sold off at a loss before they are written off after 30 years, there is no impact on the deficit whatsoever.

“The policy of selling off student loans prior to their write-off allows the Government to spend billions of pounds of public money without any negative impact on its deficit target at all, creating a huge incentive for the Government to finance higher education through loans that can be sold off”. Treasury Select Committee Feb 18 2018

This would have been an academic debate of interest only to dullards like me except that over the last year the Government has been trying to price and sell Student Debt in order to improve public finances. 

The context to this is pretty obvious – George Osborne inflicted lots of pain upon the UK to bring down the deficit, but failed to hit any of his targets by miles, and ended up taking advantage of the accounting rules around student loans to create a notional deficit reduction, even though he was still spending the same amount of money.   

On 6 December 2017 the Government sold part of the student loan “book” for  £3.5 billion, writing off £1.8 billion (51 per cent) of those loans in the process.  The write off of the value of these loads reflects the potential future default on them.  Generally Governments are better able to manage exposure to long term risks than the private sector.  As a result, private sector investors require a large risk margin when taking on student loan assets from Government. As a consequence the debt had to be sold at a large loss to reflect that risk margin. 

This reduced the size of Government debt, but it also reduced the in year deficit by roughly the same amount (because a whole bucket load of cash flowed into the Government’s coffers).  The Government plans to sell off £12 billion of loans over the next five years. If the rate of losses on these sales is maintained, billions of pounds of student loan losses will be crystallised without having any impact on the deficit.  The size of these losses are greater than if they remained on the Government’s books, because of the large risk premium that private sector investors require. 

So despite taking a massive hit on the losses Government debt still falls, as does the deficit as a result of the transaction.

I’m not the only person who thinks there is something weird about this.   Really really weird.

In February this year the Treasury Select Committee admitted that they aren’t really sure how these conditional loans should be accounted for either.  The extent to which these loans will never be repaid clearly affects their value, but there is no accepted International accounting convention that covers this.   The TSC has actually written to other countries with similar contingent student loads to try and come up with an accepted international way to account for loans which will never be repaid.

This may seem like a dry accounting point, but changes to the value of the Student Loan book have a big impact on the size of the national debt. Changes to the accounting treatment of Student debt changes the size of the deficit too

Lets just pause for a moment.  After 8 years of bringing down the deficit we don’t actually know how big the deficit is, and we don’t really know how big the pile of debt is either.  As the Treasury Select Committee remarked this year: 

There is no effective control over the increasing fiscal cost of the student loan regime”    


The total pile of student debt is now over £100bn, which even in the big numbers of Government spending is a massive amount.   By comparison the Child Support Agency maintenance arrears mountain is £3.7bn.  This however is only the debt on the student side.  Wes Streeting’s vision of a competitive market in students has come to pass.  Liverpool University recently borrowed £250m from capital markets by a rights issue.  Oxford University raised £750m by the same route.   Rumours are that there are unpopular former Polytechnics trading at a loss, with debt they can no longer service due to lower than expected income from students. 

There is a pretty obvious solution to this from an accounting perspective – if the full value of the loan isn’t to be repaid it should be treated as a partially repayable grant, particularly because the write off is a feature of the system, not an accident. Which means that the deficit will go up, but at least we will have a set of accounts which realistically reflect the financial status of the entity that the accounts represent.

But the consequences aren’t so easily dealt with.   Large amounts of individual debt to be serviced will hang over UK graduates for decades to come, changing their economic behaviour.  HE institutions will struggle to service debt they can afford if they can’t attract students.

This is more the weird.   These are clear signs of market failure affecting a key part of our national infrastructure. And rather than deal with that market failure the Government is taking advantage of it to disguise the true extent of it’s borrowing.

This isn’t just weird.   It’s dangerous, and dishonest.

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