This report by the IFS shows that higher interest rates has increased the government cost of financing the student loan system by more than £10 billion per year.
The government’s total up-front outlay on student loans in England was around £20 billion in 2022–23 and is forecast to rise to £24 billion by 2027–28.
If the government can borrow at a lower rate of interest than the interest it charges on student loans, then borrowing to lend money to a student who goes on to repay the loan in full will be a profitable transaction for the government. When the opposite is true, the transaction is loss-making: it becomes costly for the government to provide student loans even to those students who go on to repay them in full, because the interest costs on the government’s borrowing exceed the interest payments received from the student.
In recent years, the government’s borrowing costs have always been lower than the interest rates it charged on student loans. This is now expected to change. As a result, as well as making a loss on the loans that are not repaid, the government can now also expect to make a loss on the loans that are.
The true additional taxpayer cost due to the recent rise in government borrowing costs is likely around £10 billion per year. The exact number will depend on graduates’ future earnings and future RPI inflation, which governs student loan interest rates; predictions for either of these are highly uncertain.