Research carried out by the Institute for Fiscal Studies (IFS) has revealed that the cost associated with financing the UK’s student loan system has increased by more than £10 billion per year.

The IFS attributes the increase to higher interest rates and changes in government borrowing over the past two years.

It said that funding student loans has become ‘substantially more expensive’ for the government, and its official measures of the cost of student loans do not reflect the increase.

The business group said that if the government can borrow at a lower interest rate than the interest it charges on student loans, then lending money to a student who subsequently repays their loan in full will prove to be a profitable transaction for the government.

In its report, the IFS stated: ‘In recent years, the government’s borrowing costs have always been lower than the interest rates it charged on student loans. This is now expected to change.

‘Yields on gilts (government bonds) have risen substantially over the past two years and are now higher than expected RPI inflation, which will determine the interest rate on newly issued student loans. As a result, as well as making a loss on the loans that are not repaid, the government can now also expect to make a loss on the loans that are.’