COMMONS

"Absurd" to use flawed inflation measure to calculate student loan interest

11 May 2018

The Treasury Committee publishes the Government and Office for National Statistics response to its report on student loans.

Student Loans report recommendations

The Committee's report contained the following recommendations:

  • The Government must reconsider high interest rates on student loans as part of its review
  • The Government must abandon using RPI in favour of CPI to calculate interest rates
  • 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

Chair's comments

Commenting on the DfE’s response, specifically regarding the use of RPI to calculate interest rates on student loans, Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee, said:

"Government formulae affecting people’s incomes, such as pensions and benefits, often use CPI. Formulae affecting outgoings, including student loan repayments, often use RPI, which normally gives a higher rate of inflation. As the Royal Statistical Society said, this appears grossly unfair.

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.

In its response to the Committee’s report, the DfE acknowledged the flaws of RPI, but argued that continuing its use has provided consistency over time. 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."

Commenting on the ONS’ response about the classification of student loans as financial assets, Mrs Morgan said:

"Loans that are intended to be written off are, in substance, a partially repayable grant rather than a loan. As the ONS states, ‘there are certain features of UK student loans that appear to distinguish them from other loans.'

One such feature is that as student loans are written off after 30 years, a student loan issued today will have no impact on the deficit until 2048, even though the DfE recognises that 40–45 per cent of the loan will never be paid back.

These are the international accounting rules to which the Government must adhere. But as such, £6–7 billion of the £13.6 billion 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.

The ONS’ decision to work with Eurostat, the IMF and other countries to identify how such loans should be treated appropriately is therefore welcome."

Further information

Image: iStockphoto

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