Write-offs: not as costly as Conservatives would have you believe

The Institute for Fiscal Studies has published a note on writing off tuition fee loan debt.

It focuses on the impact on Public Sector Net Debt and opens by making the same arguments I made back in July, though the IFS does not name Jo Johnson as the source of the erroneous claims about debt write-offs.

IFS instead estimate £20billion in today’s terms would be added to PSND by 2050 if all post-2012 tuition fee loans were abolished today: there is little to no immediate impact and debt increases only because repayments that were projected to arrive over the next three decades have been lost.

IFS also model a partial write-off designed to equalise the tuition fee loans taken out by pre-2012 and post-2012 borrowers. This they estimate would cost around £10bn.

Both estimates assume that the write-off is done now. The difficulty with this policy is that as loan outlay touches £15bn this year (and repayments remain low) the stock of outstanding loan balances grows rapidly. Were a political party to contest the next scheduled general election in 2022 with a full tuition fee loan write-off, IFS believe the long-run cost would climb to £60bn.

IFS downplay the immediate impact on the deficit of writing down outstanding loans, because this impact has no cash implications. It is largely a paper exercise which records the loss on loans; the cash impacts (loan outlay and repayments) have already happened, it’s just that they had no impact on the deficit at the time.

Even though there would be a one-off hit to the deficit today of £34billion, the real consequence is the lost future repayments, these push debt up by £20bn but only much, much later.

As has been explained here before, the way loans score as income and expenditure is bizarre (the deficit is a measure of how much expenditure exceeds income) with only interest accruing counting as income (even though that’s not repayments) and loan write-offs counting as expenditure.

The bottom line is that loan write-offs are a feasible policy option and the IFS appears to have gone out of its way to remind politicians of this.

You might read this summary as an endorsement of Neil Collins’ article in the FT about student loans and quantitative easing. But that piece is seriously confused, typifying a common failure to think through the connection between student loan interest and the much-quoted line that three-quarters of borrowers will not clear their loan accounts before balances are written off (30 years after repayments first fall due on “English” post-2012 loans).

One day, [graduates] suspect, [the loan scheme] will collapse and their debt will be written off. Even under the current rules, an analysis from the Institute for Fiscal Studies concluded that three-quarters of graduates will never pay off their loans. Meanwhile, the government is so unpopular with freshly enfranchised youth that Philip Hammond has signalled changes to the scheme and there’s another Budget coming up.

Writing off the entire £100bn would destroy the fantasy that the chancellor can ever balance the books. More likely is some variant on “extend and pretend” where the student’s liability continues to grow but the date when it’s actually due recedes into the distant future. It would amount to a sort of quantitative easing for students, rather as PPI mis-selling became QE for poorer borrowers, and the real thing helped the rich. Taking what looks like expensive money may not be so silly after all.

That three-quarters of borrowers do not clear their accounts indicates that you need to understand more than compound interest to understand income contingent repayment loans.

Firstly, you need to appreciate that the interest accruing may not be repaid. Student loans are not ‘expensive money’, unless you become a very high earner (in which case, you can repay early without penalty). The repayment threshold, policy write-off and built in death and disability insurance offer serious protection to future low earners.

Secondly, clearing balances is not the same as repaying the equivalent of what was borrowed in the first place. ‘Never pay off’ can easily conflate these two and mislead about what the cost to government is.

Thirdly, and most importantly, the loan scheme is not self-financing. It is supported by a large (projected) public subsidy (as well as the government balance sheet that allows so many loans to be issued before repayments rise to significant levels). What ‘balancing the books’ means in this context is that the current level of projected subsidy continues to be tolerated.  We already have the precedent for the ‘active management’ of variance from those projections (the freeze on repayment thresholds).

Fourthly, don’t be misled by the quantiative easing analogy: the government funds student loans by borrowing (issuing gilts) to cover the annual shortfall between loan outlay and repayments. It isn’t printing money or creating loan accounts out of thin air (like a private bank might do).

If Collins had made his point about ‘pretend and extend’ in the context of predicted growth in graduate earnings, he might have had been on firmer ground, but not in relation to interest accruing. It’s well understood that interest will accrue without being repaid. In fact, it’s a feature not a flaw. Write-offs are planned, the issue is whether they could and should be brought forward.

(You might though wonder why such interest is counted as annual income in the national accounts, but that’s another matter and reinforces the point above about why the IFS downplays the deficit impact of loan write-offs).