The debate around funding student loans has largely focused on what share of student loans will be repaid, and what share of the cost will need to be picked up by the taxpayer. Much less attention has been paid to the government cost of financing student loans that do get repaid. In this report, we investigate how the cost of student loans including these financing costs has changed as a result of increases in government borrowing costs over the past two years.
Key findings
1. The cost of government borrowing as measured by the 15-year gilt yield has risen from 1.2% to 4.0% over the past two years. Relative to expected RPI inflation, this is a 3 percentage point increase. As the interest rate on student loans is now the rate of RPI inflation, this means that the government can expect to pay 1.6 percentage points more in interest on its debt than the interest rate it charges on student loans. Two years ago, just before the most recent student loans reform, it could expect to pay 1.4 percentage points less than the rate of RPI inflation.
2. This increase in government borrowing costs translates to an increase in the expected cost of student loans including financing costs of more than £10 billion per year. With borrowing costs as at the end of 2021, the government could have expected to earn a total net profit of £3.2 billion on student loans to the 2023 university entry cohort, arising from the positive spread between the interest it charged on student loans and the interest it paid on its debt. With today’s borrowing costs, this interest rate spread is negative, and the government can expect to make a loss of £7.3 billion.
3. Concerningly, this extra cost is not reflected in either of the government’s official measures of the cost of student loans. The ONS measure does not take the cost of government borrowing into account at all. The DfE measure that underlies the so-called RAB charge uses a backward-looking measure of borrowing costs, which does not yet capture the sharp rise in gilt yields over the last two years.
