I am writing to offer the Office for National Statistics (ONS) response to the Treasury Committee report on Student Loans.
The Committee made one recommendation to ONS:
“The Government is not responsible for the international accounting rules that allow the fiscal illusions within student loans to exist. However, the National Accounts accounting rules regarding financial transactions were not intended to be used for loans that, as the Government readily promotes, are designed to not be paid back in full. Loans that are intended to be written off are, in substance, a partially repayable grant rather than a loan. The ONS should re-examine its classification of student loans as financial assets—which they are in legal form—and consider whether a portion of the loan should, in substance, be classed as a grant. (Paragraph 31)”
In our written evidence, submitted to the Committee January 2018, we explained how student loans are currently treated in the National Accounts and public finance statistics, specifically that student loans are treated as any other loan following the approach mandated in the European System of Accounts and System of National Accounts.
However, as you mention in your report, there are certain features of UK student loans that appear to distinguish them from other loans. They have a high level of contingency, both as they are based on a student’s subsequent income and as there are a number of scenarios under which the loans, or the portion of the loans not yet repaid, will be written off.
Reflecting further on the contingent nature of student loans and the issues raised by the Committee, we recognise that there is a need to establish whether student loans should be treated as loan assets for government, or whether they should in part, or in total, be viewed as contingent assets. This is not an easy issue to tackle and one which has implications wider than the UK given the use of income contingent repayment student loans in other countries.
We have therefore begun working with Eurostat, the IMF and other countries to discuss the relevant issues and examples with a view to identifying the appropriate statistical treatment, and from there to develop relevant guidance. As part of this dialogue, on 9 March, ONS, Eurostat and statisticians from countries across Europe discussed possible statistical recordings for income contingent loans, using the example of UK student loans as a case study. The discussion was productive and helped not only to frame the statistical discussion but also to identify other countries dealing with the complex issue of income contingent loans.
ONS is continuing to pursue international dialogue on this issue and Eurostat have indicated their support of this agenda by proposing to include statistical guidance on the recording of income contingent repayment loans in the next edition of their Manual on Government Deficit and Debt, which has an anticipated publication date of late 2018 or early 2019. I hope the Committee will welcome this work.
ONS also noted the following recommendation:
“The Committee sees no justification for using RPI to calculate student loan interest rates. RPI is no longer a National Statistic and has been widely discredited. In its Autumn Budget the Government acknowledged that the use of RPI was unfair for business rates, and the Committee is unconvinced by the case put forward for its use by the then Minister, in line with the Committee’s report on the Autumn Budget. The Government should abandon the use of RPI in favour of CPI to calculate student loan interest rates. (Paragraph 64)”
As the Committee is aware, ONS has put on record that RPI is a very poor measure of general inflation. There are other, better measures available and any use of RPI over these far superior alternatives should be closely scrutinised.
28. The National Accounts accounting rules stipulate that if student loans are sold off at a loss before they are written off after 30 years, there is no impact on the deficit whatsoever. The policy of selling off student loans prior to their write-off allows the Government to spend billions of pounds of public money without any negative impact on its deficit target at all, creating a huge incentive for the Government to finance higher education through loans that can be sold off.
Under the international National Accounts standards, when loan assets are sold the transaction is a purely financial one (as with sales of equity and bonds) with no impact on the net borrowing of the seller, purchaser or loan holder. The rationale for this treatment is that at the point of sale of the asset there is no change to the liability of the holder and so no debt cancellation crystallises.
As the Committee have highlighted in their report, the National Accounts rules mean that when student loans are sold, as was the case in December 2017, there is no impact on public sector net borrowing (the deficit). There is an impact on public sector net debt, where it is decreased at the point of sale by the amount of the sale value, although it should be remembered that public sector net debt will have been increased by the higher nominal value of the loans at the point of loan issuance. These fiscal impacts reflect the National Accounts accounting treatment for all loans.
As previously communicated to the Committee, ONS has begun work with international agencies and other National Statistical Offices to consider further the most appropriate statistical recording of income-contingent loans, such as UK student loans. It is planned that through this work, initiated by ONS, an appropriate statistical treatment in National Accounts can be agreed internationally. If this treatment were different to that currently applied by ONS to UK student loans then it may not only impact the treatment of the loan assets themselves but also the sale of those assets. However, whether there would be an impact and the extent of any such impact depends on the details of any new internationally-agreed treatment.
ONS will be announcing, in the Public Sector Finances release of 24 April 2018, the work it is doing with the international statistical community to consider the statistical accounting of income-contingent loans, such as UK student loans.
Deputy National Statistician for Economic Statistics
Office for National Statistics
23 April 2018
1 Treasury Committee, Seventh Report of Session 2017–19, , HC 478
Published: 11 May 2018