Raising the student fee cap to £7,000 per year would cost the government up to £1.3bn per year under current arrangements.
This is unaffordable at a time when the Department for Business Innovation and Skills is looking to cut at least 25% from its budget. Reforming the student loan subsidy is therefore inevitable, and the imposition of a real interest rate is the most straightforward reform option.
A real interest rate of 3% would leave middle earning graduates paying up to £15,000 more over their lifetimes for the same education as their better-off peers.
One solution to this, as the SMF has previously suggested, is to introduce income-contingent interest rates so that higher-earning graduates face a commercial rate of interest.