Student loan costs to balloon by £10bn a year - IFS report

Funding the student loans system in England is expected to cost the government an extra £10bn a year, according to economists.

Higher interest rates over the past two years are behind the higher costs, the Institute for Fiscal Studies said.

It added the government could expect to make a loss on all student loans, regardless of whether they were repaid in full or not.

The Treasury said it had kept tuition fees frozen to deliver for students.

The system is problematic for the government because interest rates on student loans are pegged to the Retail Prices Index (RPI) measure of inflation, which is currently at 5.3%, but the rate the government has to pay on its debt is set to rise above that.

The IFS said that in recent years - until interest rates started rising - the government's borrowing costs were lower than the rates it charged on student loans, so it made a profit when they were repaid.

But as inflation has risen government costs have also gone up, and how it borrows its money, in the form of bonds, has meant it has become more expensive to finance the student loan system.

"The true additional taxpayer cost due to the recent rise in government borrowing costs is likely around £10bn per year," the IFS said in its report.

This would have "major consequences for the cost of funding student loans", said lead report author Ben Waltmann.

"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," he added.

"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."

The researchers said funding the system had become "substantially more expensive" over the past two years, but the figure was not reflected in the official measures of the cost of student loans.

The think tank calculates that the government can expect to lose more than £7bn per year on new loans and claims it could have expected a total net gain of more than £3bn if government borrowing costs were what they were two years ago.

A Treasury spokesperson 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."

The BBC has approached the National Union of Students for comment.