England’s student loan system will cost the government an extra £10 billion a year due to higher interest rates, the Institute for Fiscal Studies (IFS) has said.
Over the past two years, the government’s borrowing costs have become higher than the rates it charges on student loans.
The interest rate that students have to pay is determined by the Retail Prices Index (RPI) inflation, currently at 5.3 percent. However, the rate the government has to pay on its debt is set to rise above that number.
As a result of the student loan rates being lower than the government’s borrowing costs, economists from the IFS have predicted losses for the Treasury.
The IFS report showed that if the government borrowing costs were at the rate they were two years ago, the Treasury would gain more than £3 billion on new student loans. With today’s borrowing costs, the government faces a total net loss of more than £7 billion per year on new student loans.
The Office of National Statistics (ONS) does not take the cost of government borrowing into account at all, the IFS said.
The ONS considers only the share of loans that is not expected to be repaid with interest—as government spending when loans are issued. It also counts any interest paid on government borrowing to fund student loans together with general interest spending.
The Department for Education uses a different system, which takes account of the government’s borrowing costs but only with a long time lag. It uses a backwards-looking ten-year rolling average of gilt yields.
Then, a prediction for RPI is used to produce a rate relative to RPI inflation.
“All this means that official statistics are likely understating the true cost of the student loans system,” Mr. Waltmann said. “In reality, the system has become more expensive.”
At the end of March 2023, the value of outstanding loans was £206 billion. The government has estimated that by the mid-2040s, this amount will increase to around £460 billion (2021/2022 prices).
Officials expect that around 27 percent of full-time undergraduates, starting in 2022/2023 will repay the government in full. More than 60 percent of new students from 2023/2024 are expected to repay their loans in full.
The IFS suggested that student loan interest rates should be in line with actual long-term government borrowing costs—“neither much higher nor much lower.”
Otherwise, it can result in a “costly, opaque and oddly-targeted subsidy for student loans.”
“As things stand, the government can plausibly claim that no one who started an undergraduate degree since 2023 will need to repay more on their student loan than they borrowed,” the IFS said.
This approach could encourage some prospective students, the report suggested, who might otherwise be deterred from going to university “by a fear of taking on large amounts of student debt.”
The IFS also suggested that the government may need to be cautious about announcing measures that could deter young voters ahead of the looming general election.
The Epoch Times contacted the National Union of Students for comment.
