Business is booming.

High interest rates add £10bn to cost of England’s student loan system


Unlock the Editor’s Digest for free

Higher interest rates add more than £10bn a year to the likely cost of England’s student loan system, but this will not be captured by official measures, according to analysis by a leading think-tank.

The Institute for Fiscal Studies said on Tuesday that the UK government could now expect to make a total net loss of more than £7bn a year on loans for people starting courses last year.

That compared with an annual profit of £3.2bn if the government’s own borrowing costs had remained at their late-2021 level, the think-tank said.

The difference of more than £10.2bn was because the annual yield on 15-year gilts — a proxy for the government’s cost of financing new borrowing — had risen from 1.2 per cent at the end of 2021 to 4 per cent by the end of 2023.

Meanwhile, newly issued undergraduate student loans will be repaid at the rate of retail price inflation, which the Office for Budget Responsibility, the fiscal watchdog, expects to average just 2.4 per cent over the next 15 years.

“The government was always going to lose money on the fraction of loans that aren’t repaid in full . . . Now it can expect to make a substantial loss even on the loans of graduates who pay them back,” said Ben Waltmann, senior research economist at the IFS.

In its paper, the think-tank said the exact cost to taxpayers of the student loan system would depend on how graduates’ future earnings and RPI inflation evolved, as well as on changing conditions in gilt markets.

But on current projections, it was clear “that funding student loans has become substantially more expensive . . . and official measures do not reflect that at all”.

In 2021-22, 2.86mn students were enrolled in higher education in the UK, according to the House of Commons Library. Graduates in England begin repaying student loans only when their earnings reach a certain threshold.

The Office for National Statistics changed the way it accounts for student loans in 2018 to deal with previous concerns it was missing the cost of loans that would never be fully repaid. The agency now counts loans it expects to be written off as government spending in the year they are issued.

But the IFS said the ONS still failed to reflect the spread between government borrowing costs and student loan interest rates in the public finances at the point when loans were issued.

Instead, the ONS counts any interest paid on government borrowing to fund student loans together with general interest spending.

The Department for Education has a different method of accounting for student loans, which does take account of the government’s borrowing costs but only with a long time lag, using a backward-looking 10-year rolling average of gilt yields.

“All this means that official statistics are likely understating the true cost of the student loans system,” Waltmann said. “In reality, the system has become more expensive.”

He added that such mismeasurement hindered political debate on how the system should work.

If graduates repaid loans at a rate well below the government’s own cost of borrowing, this amounted to “a costly, opaque and oddly-targeted subsidy”, the IFS said, because it was of most benefit to the high earners who would have repaid their loans in full even if interest rates were higher.

On the other hand, the IFS noted, the government could now “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 Treasury was contacted for comment.



Source link

Comments are closed, but trackbacks and pingbacks are open.