National Debt & Existing Student Loans

The third effect would be to hammer tax payers. That’s because abolishing fees and reintroducing grants would cost taxpayers £12billion a year, which means the equivalent of an extra 2p on the basic rate of income tax. And dealing with historic and outstanding student debt would cause an increase in our national debt of roughly £100billion, or some £3,500 debt per household.

That’s Jo Johnson writing for the Huffington Post last week. Let’s ignore the deliberate mispresentation of Labour’s revenue-raising measures (though not a buffoon, our Minister shares his brother’s “opportunism”) and concentrate on the claim about debt.

That claim certainly shouldn’t be read in the way Johnson wants you to read it.

1. At end of March 2017, outstanding loan balances on the DfE’s books stood at £89billion. These are the “English” loans for which UK government is responsible. The more familiar £100bn figure relates to the whole of the UK (HE and student loans debts are devolved matters – the other £11bn or so is the responsibility of the administrations in Cardiff, Edinburgh and Belfast).
2. DfE accounts state that the outstanding loans are worth £61.5bn: that’s the estimated value of the future cashflows associated with the existing loans (the ‘fair’ or ‘carrying’ value).
3. Let’s say we write them all off. What have we lost? Those future cashflows.
4. The immediate impact on Public Sector Net Debt is … zero. PSND excludes student loans as illiquid assets. They are on the national accounts but don’t count in the headline statistic. If we abolish them, we don’t have them anymore and they still don’t count in PSND.
5. But what about Public Sector Net Borrowing (PSNB)? When you write-off student loans the government’s loss scores as capital expenditure and increases the main measure of the deficit, no?
6. That’s right, but PSNB does not drive debt. The Public Sector Net Cash Requirement does. And when PNSB is translated into PNSCR certain elements are removed, including student loan write-offs.
7. Why? Student loan write-offs have no immediate cashflow consequences. (If you have some familiarity with accounting think about translating profit and loss or income and expenditure into cashflow: things like depreciation are removed.) Student loans are only recognised in borrowing measures when the loss on them is known. The cashflows have already occurred: money was loaned, and money was repaid. It’s just that the loans are now being recognised as loss-making or surplus-making. (Student issuance and repayments do not affect PSNB only write-offs and  annual interest do).
8. So if we write off outstanding loans, there is a hit to capital expenditure and PSNB, but no immediate effect on debt.
9. In future years, cashflows and debt are affected. As the original repayments fail to be paid, projections will have to be updated and resulting shortfalls addressed. Repayments in 2016/17 amounted to £2.4billion and were expected to be over £10bn for the course of this parliament.
   For post-2012 loans, repayments are projected to last for 30 years and so the impact on national cash and debt of an abolition will drip through over those decades.
10. The impact on PSND, though, will not be the face value, but the fair value. In abolishing loans we would be giving up those repayments that the government records as being worth £61.5bn in net present value terms.

PS Don’t just take my word for it. Here’s the OBR writing last year on student loans:

Chart 3.7 shows our implied projections for future write-offs. These will affect net borrowing as they are crystallised, but will only affect net debt indirectly, due to the absence of repayments thereafter.

Paragraph 3.10 of its Fiscal Sustainability Analytical Paper: Student loans update (July 2016).