14 September 2010
Raising fees to £7000 will be unaffordable for the Government unless it removes the current subsidised interest rates the independent think tank the Social Market Foundation has warned. The SMF's analysis further shows that charging commercial levels of interest on these loans would result in middle earning graduates paying back up to £15,000 more than their counterparts who did the same degree but are more well paid.
If as expected the government chooses to raise the cap on student fees from £3,290 to £7,000 a year, the result will be a £1.3bn annual cost to government if the current interest rate subsidies and loan write-offs are continued, according to the SMF's new analysis. This would more than double the current cost of the subsidy of £1.2bn per year.
At a time when the Government is looking to cut public spending by £83bn, reforming the student loan subsidy is therefore inevitable, and imposing a positive real interest rate on student loans is the most obvious reform to make..
Commenting on the new analysis Director of the SMF Ian Mulheirn said:
"Under current arrangements, raising the fee cap will cost the Government around £1.3bn a year in subsidies on extra student loans. This simply isn't affordable at a time of massive cuts in public spending. The mosty obvious option for funding this rise will be to charge students higher interest rates on their loans.
Students are worrying about fee rises but what they should really be worried about is the Government ending susidised loans.
Commercial interest rates on student loans will mean middle-earning graduates will end up paying between £10,000 and £15,000 more for their education than better-off students who take the same degree.
Raising interest rates on student loans across the board risks deterring lower income students from higher education. We need more careful consideration of how to make higher fees both fiscally viable and fair to graduates. Variable interest rates would be one solution to this problem".
• The Browne Review of higher education is set to report on 11 October.
• The SMF's student fees briefing note is available here
Figure 1: Distributional consequences of real interest on student loans: lifetime payments by graduate income position.