Cost to taxpayers of student loans up £10bn

THE cost of funding student loans is expected to jump by more than £10bn per year as interest rates soar, the Institute for Fiscal Studies (IFS) has said.

Surging government borrowing costs mean taxpayers are expected to record a loss on loans that are fully repaid by graduates, as well as those which are not, the findings show.

The Government’s borrowing costs on student loans were always lower than the interest rates it charged, enabling it to make a profit on the debt.

However, higher interest rates have pushed up the cost of funding student loans from 1.2pc to 4pc, higher than the interest rate expected to be charged on them. This rate is set according to the Retail Prices Index, which the Office for Budget Responsibility expects will average 2.4pc over the next 15 years.

If borrowing costs had stayed at their level two years ago, before the Bank of England began raising interest rates from a record low 0.1pc to a 15-year high of 5.25pc, the Government would have £3.2bn profit from loans to the 2023 intake. However, the IFS has estimated this will now be a £7.3bn loss.

Ben Waltmann, an economist at the IFS, said: “This extra cost due to higher borrowing costs is not reflected in the Government’s measures of the cost of student loans. This means that the loss of more than £10bn per year is not being captured in official figures.” The Government loans around £20bn to 1.5m students in England every year. For those who started courses in 2023, their total debt by the time they graduate will be £42,900.

Graduates do not start paying back this debt until they start earning more than £25,000 per year and the debt is written off after 40 years if the loan is still outstanding. Only about 27pc of full-time undergraduates are expected to repay their loans in full.

The Government 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.”