Chancellor Philip Hammond has been dealt a £12 billion blow after statistics officials changed the way student loans are accounted for in the public finances.
The Office for National Statistics (ONS) will now split the loans into two parts - financial assets and government expenditure - as only part of the borrowings will ever be repaid.
Currently, student loans do not count as government spending, while interest payments are counted as income, despite the fact that many graduates will never pay all the interest back because they earn too little.
The new approach will create a £12 billion hole in the public finances.
It means that this year's deficit, which the Office for Budget Responsibility (OBR) had recorded at £25.5 billion at the time of the Budget, will grow to around £37.5 billion.
ONS deputy national statistician for economic statistics Jonathan Athow said: "To ensure our treatment of student loans better reflects the way the system works in practice, we will split the Government's student loan payments into a portion that will be repaid and is therefore genuine government lending and a portion that is not expected to be repaid, which will be treated as government spending.”
A Government spokesman said: "This is a technical accounting decision by the independent ONS. It does not affect students, who can still access loans to help with tuition fees and the cost of living and which they will only start repaying when they are earning above £25,000."
Rachel Hewitt, director of policy at the Higher Education Policy Institute, told talkRADIO’s Julia Hartley-Brewer that the government may respond by changing regulations around student borrowing.
“There’s a number of impacts it could have - it could mean there’s a cap placed on the number of people who go to university.
“At the moment no one repays until they’re earning £25,000. [The government] could reduce that figure.
“Amongst the list of things they could do, none would be particularly popular in their impact on higher education.”