Following an inquiry into the student loan regime, the committee recommended the government to abandon using RPI in favour of CPI to calculate interest rates and said it should reconsider high interest rates on student loans as part of its review earlier this year. MPs said the Office for National Statistics (ONS) should re-examine its classification of student loans as financial assets, and consider whether a portion of the loan should be classed as a grant.

The Department for Education (DfE) has now responded and defended its continued use of RPI as the inflation measure, stating: ‘RPI has always been used for calculating interest on student loans, providing consistency over time. RPI is also the measure used for the Government’s index-linked gilt issuance.

‘The flaws in the RPI measure of inflation are well understood, and the ONS have delivered a substantial programme of work to improve the way they measure inflation over the last two years.’

 Nicky Morgan, chair of the Treasury committee, said: ‘Continuing to use a measure that it readily admits is flawed, on the grounds of consistency, is absurd; it guarantees that student loan interest rates will be consistently flawed.

‘As RPI has been de-designated as a national statistic, the committee has urged the government to abandon its use to calculate student loan interest rates in favour of CPI.’

On the issue of the high cost of student loans, the DfE argues that in practice, charging an interest rate of RPI+3% during study only increases the lifetime payments of those who go on to be high earners and pay back all, or very nearly all, of their student loans. The vast majority of those who do not fully pay back their loans will see this part of their borrowing written off.

Its responses states: ‘Reducing the in-study interest rate would, therefore, benefit only high earning graduates, and even then only years in the future when they are close to repaying their loans in full.

‘This is a key reason why the government decided to increase the repayment threshold to £25,000 instead of lowering in-study interest rates; it was a more progressive change because it benefited lower and middle earning graduates.’

The committee’s report also challenged the government’s approach to writing off student loans after 30 years.  It said this mean a student loan issued today will have no impact on the deficit until 2048, even though the DfE recognises that a high proportion of it will never be paid back, and claimed this allowed the government to escape scrutiny.

The DfE issued £13.6 billion of student loans in 2016-17, and based on the current RAB charge (the proportion of student debt that the government expects to write off) of 40%-45%, £6bn-£7bn of annual write offs are missing from the deficit – the equivalent of the entire NHS capital budget. Its inclusion would increase the deficit for 2016-17 by 13%, from £45.5bn to over £51bn.

The government sold £3.5bn of student loans last year for £1.7bn, a 51% write off. The government plans to sell off a further £12bn of student loans over the next five years. If the write-off rate remains the same as the previous sale, over £6bn of student loans could be written off without impacting the deficit.

Morgan said: ‘These are the international accounting rules to which the Government must adhere. But as such, £6bn–£7bn of the £13.bn of student loans issued by the DfE in 2016–17 is expected to be written off, but is missing from the deficit. This allows the government to escape fiscal scrutiny.’

In its response to the committee, the ONS stated: ‘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.’

Treasury committee student loans report

DfE and ONS responses to Treasury committee student loan report

Report by Pat Sweet