Student loans accounting – a personal history

The Office for National Statistics’s recent decision on student loans coincides with the traditional period for reflection. From a personal perspective, it offers a somewhat ambiguous opportunity to look over my writing and campaigning on this issue.

It’s a little over seven years now since I first wrote about accounting and student loans. In the early days, I made a lot of mistakes — until I learned not to treat academics as authorities on the matter and realised that national accounting and departmental budgeting were live issues subject to surprisingly regular changes.

After the publication of The Great University Gamble, I decided to focus more on the subject. I settled on this somewhat quixotic project for two reasons. Firstly, after 2013/14, I was spending most of my time on setting up the Fine Art Maths Centre and teaching the associated history and philosophy of mathematics. I could only concentrate on some aspects of HE policy; secondly, the accounting and budgeting of student loans was neglected and appeared to be having an undue influence on policy decisions.

My particular interest was in the sale of student loans, which despite promising to lose money for government was being pursued primarily because of the composition of the headline debt measure, Public Sector Net Debt. Student loans were excluded as an asset for being “illiquid”. This meant that PSND was one-sided in that it only reflected the liability side of loans: the borrowing used to create them.

I had also seen how close the English sector had some to radical cuts in Autumn 2013 and early 2014 after budget over-runs. These were only averted after a new, retrospective budgeting procedure was agreed in 2013/14. This was designed to “incentivise” BIS (and then DfE) to manage the estimated losses on student loans to an agreed level of 36 per cent of outlay. The “target” mechanism has had a confusing life since its introduction and is currently suspended while the review of tertiary education funding is being undertaken.

A pamphlet for HEPI appeared in 2015. In retrospect, it seems odd that it left out any discussion about the “fiscal illusions” around the deficit that prompted the ONS review.

In mitigation, one of the main illusions was well-known and mentioned: the cost of student loans would only be declared as expenditure when accounts were closed, that is, when the losses were known. This seems sensible insofar as closures owing to death and disability and recorded when they happen, but the main costs associated with loans come from policy write-offs. Since these occur over thirty years after loans are first issued, they don’t appear for decades. The main costs for loans issued in 2012 would have appeared in 2046. A government switching from grants to loans, not only reduces its expenditure, but gets the added benefit of not having to declare the projected cost of the latter within the standard political horizons. (The issue is how and when costs are presented in national accounts – the cash went out the door at inception!)

The government had always argued that the national accounting illusion here was managed by focusing on the departmental accounts – where the estimated upfront costs of loans has to be recognised (the notorious RAB allocation and charge). But the presentational value of keeping expenditure out of the short-run picture can be seen in how the government uses its “fiscal mandate” to present macroeconomic competence to the public. And here’s where the second omission of my 2015 pamphlet comes in. At the time, I hadn’t realised that interest accruing was being treated as annual income. Mea culpa.

It was only in subsequent years that the impact of post-2012 loans and their real rates of interest began to drive up what had previously been a very minor competent of the deficit. (And one which as non-cash was removed before considering the real cash borrowing needed to fund government policy). For pre-2012 loans, the bank base rate cap means that interest accrues at 1.75%, well below inflation. Back in 2013/14, interest accruing was barely £1billion, while the deficit was touching £100billion; this year it looks set to be £4.5bn and the deficit, £25bn; for 2023/24, OBR projections suggest the relevant figures were £8bn and £20bn (prior to the accounting change)!

In 2017, the Office for Budgetary Responsibility adopted the International Monetary Funds use of “fiscal illusion” and began to apply it to the treatment of financial assets in the national accounts. They explicitly noted the growing impact of student loan interest on the deficit.

7.13 Interest on student loans: this is recorded in PSNB as it accrues, which we expect to subtract £3.0 billion from the deficit this year. Interest starts accruing from the time the loan is extended and it is recorded within the public finances for the full amount owed rather than the amount expected to be paid. In reality some of this will never result in actual cash payments, because some borrowers will not earn enough to require their loans to be repaid. Eventually, this initial over-recording will be resolved by writing off any outstanding portion of the loan. But this may not be until years later – the write-offs associated with recently issued loans are not expected to pick up until the mid-2040s. So accruing interest will flatter the fiscal position in the meantime.

ONS also (eventually) noted that this was the “more important” problem with its treatment of student loans:

… revenue is recorded in the form of interest receivable, irrespective of whether the income-contingent thresholds will be reached and the interest actually paid.

In Summer 2017, things began to move. As noted, the OBR began to publish more analyses drawing attention to the problems. At the same time, the two most influential parliamentary committees launched more focused inquiries into student loans and higher education funding. The Lords Economic Affairs Committee (EAC) had looked at loans back in 2016. I had been invited to appear as a witness in July 2016, but was prevented by ill health from attending. Instead, I gave the committee a private briefing on student loan accounting and sales in March 2017. This prompted the committee to launch a new, fuller inquiry just after the 2017 general election.

I appeared as a witness in October, less than a week after having turned out for the Commons Treasury Committee.

The latter published its report in February 2018. Complaints about the accounting for loans and loan sale were its focus. I helped the clerks behind the scenes with a number of issues, but ONS rebuffed the proposals about changes to the accounting in January 2018. The independent body argued that its treatment was robust and in accordance with international standards; it sent a similar letter to EAC in the same month. The EAC though had the wit to write to Eurostat. After their critical intervention in February, ONS changed its position and initiated a full review into the treatment of student loans in the national accounts.

It is too early to judge whether ONS’s new treatment works. It is complex, still lacking in crucial detail and utilises estimates that will have to revised regularly. ONS is defending its approach with appeal to the main EAC and treasury committee recommendation: the accounting needed to reflect the economic cost upfront. (We don’t know yet how ONS is going to treat loan sales).

This might be the time for me to review my involvement here. I have a new project starting with chess in prisons (which has ministerial backing – an unusual position for me!) and have put too many other writing projects on hold since 2010.

Any HE focus will probably be on university accounts. The change to deficit accounting means that the government is more likely to cut the cash going into the HE sector and this will make things difficult for all universities.