Government is ‘fiddling the figures to hide the true cost of student loans’, says Lords report

Ministers must stop trying to ‘mask’ the true levels of national debt linked to student loans, a damning report argues today.

An attempt at ‘accounting trickery’ has made the Government’s budget deficit appear lower than it is, the House of Lords economic affairs committee claims.

The peers want taxpayers to see the true cost of the student loan system on the economy and are calling for a steep reduction in interest rates on loans to alleviate the burden on graduates.

The report is critical of the Cameron government’s 2012 reforms to university financing, which replaced government grants with funding through tuition fees.

Tory peer Lord Forsyth of Drumlean, chairman of the Lords economic affairs committee, said there has been ‘accounting trickery attempted by the Government in 2012’

In particular the Lords on the committee are scathing about how national accounts ‘mask’ the ‘true cost’ of higher education.

When the change to funding was made in 2012, the Government’s upfront spending rose by £3billion. But because the vast majority of funding was through loans rather than grants, the national deficit was improved by £3.8billion.

The Government expects that around half of the value of student loans currently being issued will never be paid back.

However, these write-offs will not appear in the national accounts for more than 30 years. If the loans are sold before that point, the write-offs will never hit the deficit.

The report says: ‘The high rate of interest on student loans creates the illusion that Government borrowing is lower than it actually is. It was presented as a progressive measure.

‘But in reality, the motivation appears to have been the flattering effect that accrued interest on those loans will have on the deficit.’ Future governments will have to ‘adjust’ spending plans to recognise ‘historic student loan losses’. In today’s money, that would mean the Government of 2047/48 having to find an extra £8.4billion to cover expected losses on the 2017/18 loans. ‘It is unacceptable to expect future taxpayers to bear the brunt for funding today’s students,’ the report says.

‘Most student loans will not be repaid in full: some will be paid in full, some not at all, and a lot only partially repaid. The expected write-offs should be shown in the deficit when the loan is issued. The true cost of funding higher education would then be immediately apparent.’

Tory peer Lord Forsyth of Drumlean, chairman of the Lords economic affairs committee, added: ‘The accounting trickery attempted by the Government in 2012, in which the high rate of interest on student loans created the fiscal illusion that Government borrowing is lower than it actually is, has had a devastating effect on the treatment of students in England.’ 

The maximum interest rate on student loans is increasing to 6.3 per cent from the autumn, following a rise in the retail price index (RPI) measure of inflation. The rate is significantly higher than that on many unsecured loans available from high street banks. The Lords report, Treating Students Fairly: The Economics of Post-School Education, challenges Government claims that student loan interest rates are ‘progressive’ as middle-earning graduates will be hit most.

The committee is calling for the interest rate on post-2012 student loans to be reduced to the level of the ‘ten-year gilt rate’, which is currently 1.5 per cent.

The committee also warned that the expansion of higher education may have resulted in graduates doing jobs that do not require degrees as well as ‘degree inflation’ where 26 per cent of graduates received a first class degree in 2016/17, up from 18 per cent in 2012/13.