Warning for students as government loses £10bn in all student loans

The UK government is set to lose over £10 billion a year in loans for students in England, as rising interest rates have increased the cost of borrowing beyond the expected returns from student loans. 

The fiscal blow comes as the Russell Group has warned students will be left almost £2,000 worse off next year, because the government has failed to raise maintenance loans at the same pace as inflation. 

Together, the figures have raised concerns for the future financial situation of UK students, where rising loans are clashing with the government’s capacity to afford them. 

The issue was first raised by the Institute of Fiscal Studies (IFS) in a report published on January 9. 

Their findings highlighted that the interest rate for government borrowing, which increased from 1.2% to 4.0% over the last two years, had outpaced inflation of the Retail Price Index (RPI) by a relative 3%.

As the interest rate on student loans is set at the rate of RPI inflation, this means the government can now expect to pay 1.6% more interest in debts than it will receive in loan repayments. Two years ago, student loan interest would have stood at 1.4% more than government debt interest.

Put into real terms, this translates into a net loss of more than £7 billion, whilst the government could have previously expected a profit of £3 billion.

Worryingly, this extra cost due to higher borrowing is not reflected in the government’s measures of the cost of student loans. 

Ben Waltmann, a Senior Research Economist at the IFS

The IFS warned that this loss is not being captured in official government figures.

Ben Waltmann, a Senior Research Economist at the IFS, said: “Worryingly, this extra cost due to higher borrowing is not reflected in the government’s measures of the cost of student loans. This means that the loss of more than £10 billion per year is not being captured in official figures.”

The deficit comes amidst concerns around the rising cost-of-living for the UK’s student population.

The Russell Group has warned that because student loans are only set to increase in line with projected inflation, rather than real figures, it means that the increase in loans set for later this year will actually amount to a nearly £2,000 loss. 

Joanna Burton, the head of policy (higher education) at Russell Group, said students were a “significant but often overlooked casualty of rising cost-of-living pressures”. 

Despite this, in its report dated January 9, the IFS floated the idea of tying the student loan interest rate directly to the government’s borrowing cost, which would amount to a significant increase.

The report said: “As we have long argued, it makes sense for student loan interest rates to be broadly in line with actual long-term government borrowing costs […] Charging student loan interest significantly below the government’s cost of borrowing amounts to a costly, opaque and oddly-targeted subsidy for student loans