The cost of financing England’s student loan system is expected to rise by more than £10 billion a year due to the increased cost of government borrowing, according to a leading economic thinktank.
In what it calls a “costly, opaque and oddly-targeted subsidy”, the Institute for Fiscal Studies highlights how, owing to the new cap in interest rates charged to graduates and a rise in the cost of government bonds, even loans that are repaid in full will lose the taxpayer money.
After years of low-cost borrowing, a 15-year gilt yield has risen from 1.2 per cent to 4 per cent over the past two years, making it higher than the expected Retail Prices Index (RPI) of inflation, predicted by the Office for Budget Responsibility to average 2.4 per cent over the next 15 years.
Changes introduced last autumn mean students will now only be charged interest equivalent to the current rate of RPI when paying back their loans, meaning that the government can expect to pay 1.6 percentage points more in interest on its debt than the interest rate it charges, an IFS report – published on 9 January – says.
It means that, in contrast to late 2021 – when the government might have gained more than £2,000 a year from a high earner’s student loan repayments – it is “set to lose around £800 a year even on the loans of recent graduates who pay back their loans in full”, the report says.
In total the “true additional taxpayer cost due to the recent rise in government borrowing costs is likely around £10 billion per year”, the IFS warns, with the exact figure dependent on graduates’ future earnings and future RPI inflation. The average loss per student will be £15,200.
“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,” said Ben Waltmann, a senior research economist for the IFS.
“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.”
Mr Waltmann said the potential loss of more than £10 billion per year was not being captured by the government’s measures that track the cost of the student loan system.
“Charging student loan interest significantly below the government’s cost of borrowing amounts to a costly, opaque and oddly-targeted subsidy for student loans,” the IFS report says.
“It goes against a fundamental principle behind the current student loans system, which is that graduates who can afford to pay for their own education should do so.”
The IFS says there is a “case for tying the student loan interest rate directly to a measure of the government’s cost of long-term borrowing”.
But it says such a rise needed to be “weighed against the intuitive appeal of charging no real interest on student loans” as the message that graduates will repay no more than they borrowed in real terms may “provide crucial reassurance to some prospective students who might otherwise be deterred from going to university”.
