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ONS announces review of accounting for student loans

April 24, 2018

Along with today’s public sector finance figures, the Office for National Statistics has responded to February’s Treasury Committee report on student loans and announced  collaborative, international “work” on income contingent student loans.

Student loans in the UK are different from typical loans. Notably, they have a high degree of contingency in that repayments are conditional on subsequent income and under certain conditions the loan obligation itself may be cancelled. Estimates of the proportion of student loans that will be cancelled, or written off, in the future have been rising in recent years and are a significant proportion of the total value.

… accounting standards are very clear on the treatment of loans and it is this treatment that ONS currently applies to student loans. Where the guidance in these standards is more difficult, and subject to interpretation, is around the recording of financial assets with a significant expected loss – student loans with their contingency on future income are a financial asset with this feature.

To consider the treatment of such financial assets and the accounting issues they raise, we have begun work with international agencies and other National Statistical Offices. This is a complex topic that could have potential implications for all countries with income-contingent loans. However, it is planned that through this work, initiated by ONS, an appropriate statistical treatment in national accounts can be agreed internationally.

… there could be an impact on public sector net borrowing (PSNB) … as [this measure is] impacted by interest that is accrued but not paid and loan cancellations. The extent of any impact is unknown and would depend on the details of any new internationally-agreed treatment.

As part of the same announcement, ONS has decided to classify December’s securitisation of student as a “genuine sale” and concluded that Income Contingent Student Loans 1 (2002-2006) Plc is a “financial corporation outside the public sector”.

I have asked ONS for an explanation of the decision.

For the public finances, the implications are:

The implications for the public sector finances are that the PSNCR [Public Sector Net Cash Requirement] and PSND [Public Sector Net Debt] are both reduced by the £1.7 billion cash value received from the sale, PSNFL [Public Sector Net Financial Liabilities] is increased by approximately £1.8 billion – the difference between the nominal value of the loans sold and the sale price – while PSNB [Public Sector Net Borrowing] is not impacted.

PSNB is commonly referred to as the “deficit”. The rationale for excluding the loss on loans (and the additional loss from selling) is explained in this post. The government does not target PSNFL in its fiscal mandate.

This classification decision is also contingent on the review described above.

This classification and the impact on the public sector finances is consistent with the international standards for the accounting of loans. However, as noted previously, we have begun to consider with the international statistical community how UK student loans are most appropriately recorded within national accounts. Following this work and its conclusion, if the recording of student loans was revised then consequently the recording of the student loan sale might also need to be changed. However, whether there would be an impact and the extent of any such impact depends on the details of any new internationally-agreed treatment.

For a general explanation of why the current treatment is cock-eyed, see this post which sets out why the current treatment of loans in PSNB (‘the deficit’) is distorted.



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