Student loans in England are expected to cost the government an extra £11bn a year as a result of higher interest rates massively increasing the cost of borrowing, according to analysis by the Institute for Fiscal Studies.
The IFS said the huge additional cost was not reflected in either of the government’s official measures of the cost of student loans. “This means that the loss of more than £10bn is not being captured in official figures,” it said.
In the past, the government has lost money on loans that are not fully repaid, but has made a profit on those that are. Now, however, the IFS says it is likely to make substantial losses on even those loans that are paid back in full, because the interest rate on government debt is higher than that charged on student loans.
“£10.5bn in extra costs is a lot of money,” said Ben Waltmann, one of the authors of the report. “For comparison, this is around 16% of all schools spending in England, or around half the government’s upfront outlay on student loans.
“This means there is now a case for higher future student loan interest rates than are currently pencilled in. But the politics of this are tricky: for one thing, it would lead to higher costs for current students – although it is worth emphasising that these costs would typically not affect their student loan repayments for decades hence.”
There is growing concern about the sustainability of the higher education funding system and the burden of debt on students, both of which are likely to be debated before the general election.
Until now the debate around funding student loans has focused mainly on what share of student loans have to be repaid, and what share of the cost will be picked up by the taxpayer. Less attention has been given to the government cost of financing student loans to be repaid.
According to the IFS, the cost of government borrowing as measured by the 15-year gilt yield has gone up from 1.2% to 4.0% over the past two years – a three percentage point increase relative to expected RPI inflation.
With the interest rate on student loans now set at the rate of RPI inflation, the government can expect to pay 1.6 percentage points more in interest on its debt than the interest rate it charges on student loans. Two years ago it might have expected to pay 1.4 percentage points less than the rate of RPI inflation.
“Substantial interest rate increases have major consequences for the cost of funding student loans,” said Waltmann. “While the government was always going to lose money on the fraction of loans that aren’t repaid in full, it could previously expect to make a profit on the loans that are.
“This is because it expected to charge a higher interest rate on the loans than its own cost of borrowing. Now it can expect to make a substantial loss even on the loans of graduates who pay them back, because the interest rate on government debt is much higher than the interest rate that is expected to be charged on student loans.”
A government spokesperson said: “We’ve kept maximum tuition fees frozen to deliver better value for students and taxpayers while also taking the difficult decisions necessary to more than halve inflation this year, including by resisting calls for higher spending and borrowing.”
