September 13, 2018Student Loans – is it a case of smoke and mirrors?

Student loans are a slippery subject. The problem starts with the word “loan”, which is near enough a half-truth. The latest estimates suggest that about 45% of outstanding student debt (original loan plus accumulated interest) will eventually be written off.

How the Treasury accounts for student loans and interest has been the subject of a paper from the Office for Budget Responsibility (OBR) and comments from the Office for National Statistics (ONS). Their work follows on from criticism by the Treasury Select Committee and a report from the House of Lords Economic Affairs Committee earlier in the year.

The major issue that all these worthy bodies highlight is the way in which the accounting method for the loans hides their true cost. To put it simply, Treasury accounts treat a new student loan as a ‘pure’ loan. The cost of providing student loans does not appear in the government’s borrowing figures for the year, even though the government borrows to provide the finance, because they are treated as matched by government assets, i.e. contractual debt repayable by students.

This treatment is in line with international guidance on the treatment of loans, but that guidance was never designed to cope with a loan where the chances of repayment were so variable. To exacerbate matters, as interest accrues on the student debt it is deemed to reduce annual government borrowing, although there will often be no cash reaching the government. It was an academic point in the early days of student loans but, as the graph below shows, loans have now become serious money. The total outstanding debt was £105bn in March 2018, with fresh loans running at nearly £17bn a year.

The Treasury’s accounting method means that the impact of the failure to repay gets kicked down the road until roughly 30 years after the student ends their course or on earlier death. At that point the shortfall suddenly becomes real spending and borrowing for the year rises accordingly. However, by then there will be a considerable amount of offset from the (notional) interest accruing on the pile of outstanding loans made over the previous 30 years.

To make matters even more bizarre, if the government sells the student debt before the 30 year point, the loss will never reach the annual borrowing figures. It will be classed as a “holding loss” and effectively disappear. As the OBR noted, this is an obvious incentive to sell loans before they reach their end point, even if at a sharp discount to their face value. For example, in December 2017 approximately £3.5bn (nominal value) of student loans were sold for £1.7bn.

Both the OBR and the ONS make various proposals to bring the treatment of loans closer to their economic reality. That means recognising that they will not be repaid in full and making that recognition when the loans are made (or interest accrued) rather than in the distant future.


For the Chancellor, a change to the treatment of student loans could mean that he has to rewrite all of his borrowing targets and accept larger annual debt numbers. The aim of reaching a budget surplus by the mid-2020s can probably go out of the window. The reality is that nothing financial will have changed, the flows of cash will be the same, but the issue of unpaid debt will not be one left for the government of the 2030s and beyond.

More information

For the official Student Finance Government website, see here


Important information: This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence of it without consulting a suitably qualified and regulated person. Opinions constitute our judgement as of this date and are subject to change without warning

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