Interest subsidies on student loans: A better class of drain

This paper discusses the problems that arise from interest subsidies in the UK system of student loans; systems in other countries, for example Australia and New Zealand, face similar problems. The topic appears to be narrow and technical, and of significance only to the most nerdy of commentators, so the opening section sets out the broader context in order to establish the educational importance of the issue, not least that the cost of interest subsidies is a contributory cause of the current shortage of university places. The second section explains why the interest subsidy is a major distortion with strategic and unintended ill-effects: interest subsidies tip large volumes of taxpayer resources down the drain with no educational benefit. The third section offers indicative estimates of the impact in terms of cost saving and distributional effects of different policies for addressing the problem. The concluding section sets out the wide range of desirable policy options that result from charging an interest rate related to the government’s cost of borrowing.[...]