Rishi Sunak’s government has more than doubled the amount of money it makes from charging interest on student loans, official figures show, as graduates face borrowing costs of nearly double the rate set by the Bank of England. .
According to the latest snapshot of government finances from the Office for National Statistics, accrued interest on student loans rose to £4.8bn in the 12 months to March. Compared to £2.3bn a year earlier, this was the highest annual total on record.
The increase comes despite ministers stepping in last year to cap the interest rate on student loans in England and Wales in response to inflation hitting the highest levels in 40 years, preventing a further rise in interest rates. loan costs.
The Department of Education imposed a maximum rate of 6.3% on loans last fall, which has since risen to the current level of 6.9%. It is set to rise again to 7.3% from early June as ministers aim to reflect an increase in the prevailing market rates offered by major banks on unsecured personal loans.
The expected average debt among the cohort of students starting their course in 2021-22 is £45,800 when they complete their course. About 20% of full-time college students who started in 2021-22 are expected to repay them in full, according to government projections.
Nearly £20 billion is loaned to around 1.5 million students in England each year, with an outstanding loan value of more than £180 billion.
Launched in the final months of Boris Johnson’s term, the cap prevented an increase to 12%. The rates had previously been calculated by adding 3 percentage points to the retail price index (RPI) inflation measure, which had risen in the wake of Russia’s invasion of Ukraine.
Ministers introduced the “fair deal for students” cap to avoid inflicting additional pain amid the cost-of-living crisis, arguing it was the largest-scale cut in student loan interest rates on record.
However, the government cap still represents a significant increase from the previous year, when student loan interest rates were close to 4.5%, and is almost double the current Bank of England base rate. of 4.25%.
Students who started college before 2012 also experienced a large increase in interest rates, with a much larger relative increase of 1.5% to 5% in the past year. For these students, the rate charged is the RPI inflation rate or the Bank rate plus 1%, whichever is lower.
Critics have said students face sky-high debt levels coming out of college, fueling a growing financial gap between generations and for those with low-income backgrounds versus children of wealthier parents.
Ben Waltmann, an economist at the Institute for Fiscal Studies, said the government’s current limits on post-2012 borrowing were “too high” and urged ministers to set interest rates at low, stable levels, reflecting their own cost. government borrowing.
“Interest rates that are higher than the cost of government borrowing may discourage some future students from going to college, even when that would be the best option for them and for society,” he said.
“They also create an injustice between those who pay the loans and those whose parents supported them, perhaps by borrowing cheaper through a mortgage.”