Student loan sale U-turn 'likely to cost £12bn'

The decision to abandon the sale of the student loan book is likely to cost the government £12bn over the next five years and will require a review of the public finances, Graham Parker, the Office for Budget Responsibility (OBR), told the Treasury Select Committee on Tuesday.

It may also require a revision of the decision to lift the cap on student numbers promoted by Chancellor George Osborne and due to be funded by the sale of the student loan book. Parker, an OBR member, was being questioned by Treasury select committee member Pat McFadden. Parker said the OBR had not yet been formally notified of the decision to abandon the sale, but the announcement was made by the business secretary, Vince Cable, at a Liberal Democrat meeting over the weekend organised by the Social Liberal Forum.

Parker told the committee: "What you have is higher public sector net debt if you don't sell it in the short term, but you will gradually get it back. He said a loss of £12bn to the Treasury over five years was "a reasonable assumption".

He also agreed that the lifting of the cap on student numbers was due to be funded by £5.5bn from the sale of the student loan debt over several years. He said "we will have a proper look at this when we do the autumn statement forecast but in the short term, if nothing else changes. You would have higher public sector net debt in the short term."

He said the receipts from retaining the student loan book would only come in over a long period of time.

McFadden pointed out that Wendy Prior, chief executive of the Russell Group of Universities, has already said that if the government no longer intends to use the sale of student loans to fund the uncapping of numbers "we would urge them to abandon that idea".

Osborne announced in the budget that 30,000 extra students and a complete lifting of the cap would be financed by the sale of student loan book.

McFadden, commenting after the hearing, said: "The government assumed they would raise £12bn from the sale of the student loan book, an estimate accepted at the time by the OBR. The sale has now been dropped. The OBR confirmed to the Treasury committee this morning this would lead to higher public sector debt and the need for a revision in their forecasts. The chancellor must now set out what he will do to fill this hole in his spending plans."

Cable's decision to abandon the sale stems from fears that the sale would not raise the amounts first forecast.

Treasury sources said the Conservatives still plan to go ahead with the sale of the student loan book in 2015-16, after the election, but acknowledge the Liberal Democrats do not want any sale in this financial year. They also insist that if the sale did not go ahead the effect would be on the profile net debt and not on student funding, thus ensuring that the lifting of the cap on student numbers can go ahead.