Rate hikes push up cost of financing student loans

Source: The Star

LONDON: The UK Treasury is facing a hit of more than £10bil (US$12.7bil) 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, according to a new analysis.

The Institute for Financial Studies (IFS) warned that the government would lose an average of £15,200 per student from the cohort that 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 retail price index inflation, which determines the rate at which 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.

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 the Department for Education.

"Official statistics are likely understating the true cost of the student loan system," the IFS report said. -- Bloomberg