UK Faces £10 Billion Student Loans Hit After Interest Rates Rise - BLOOMBERG
BY Bloomberg News,
, Source: Bloomberg
(Bloomberg) -- The UK Treasury is facing a hit of more than £10 billion ($12.7 billion) per year as higher interest rates push up the cost of financing student loans, meaning the taxpayer will now take a loss even on debt that is fully repaid, new analysis shows.
The Institute for Fiscal Studies warned that the government will lose an average of £15,200 ($19,401) per student from the cohort who started last year as it flips from profits to losses on the loans.
“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,” said Ben Waltmann, senior research economist at the IFS. “Now it can expect to make a substantial loss even on the loans of graduates who pay them back.”
The losses are the result of the jump in government bond yields after the Bank of England was forced to raise interest rates to rein in double-digit inflation. They are now higher than expected RPI inflation, which determines the rate the government charges students for their loans.
It’s the latest blow to Treasury coffers from an end to the prolonged period of ultra-low interest rates that followed the financial crisis.
This shift will not affect how much headroom Chancellor of the Exchequer Jeremy Hunt has against his fiscal targets, because of the way student loans are treated in official statistics.
If borrowings costs remained at their levels from the end of 2021, the government could have expected to have made a £3.2 billion net profit on the loans from students entering university in 2023, according to the IFS. Today’s public borrowing costs mean it will instead take a £7.3 billion loss.
The IFS raised concerns that this shift from profits to losses would not be reflected in the official cost estimates of the student loans from the Office for National Statistics or Department for Education.
“Official statistics are likely understating the true cost of the student loans system,” the IFS report said.