Spikes in inflation will hit students twice

When skills minister Jacqui Smith announced that the maximums in 2026/27 would rise by 2.71 per cent, she was quoting the OBR’s forecast for Q1 2027.

At the Spring Statement, that forecast was revised down – to 2.6 per cent.

Of course any benefit would have been counterweighted by the persistent failure to uplift the parental income threshold, pickled in 2007’s vinegar at £25,000.

But Iran and impending energy bill increases mean it’ll likely now rise above 2.71 per cent in the end anyway.

The Ofgem price cap for April to June was set before the war started – so household energy bills actually fall slightly this quarter.

But the cap for July onwards is now forecast to surge by 20 per cent or more, baking the Strait of Hormuz disruption into bills that will persist through autumn and winter.

By Q1 2027 households will have been paying elevated gas and electricity prices for the best part of nine months. Energy isn’t the only channel either – oil prices feed through to food production and transport costs with a lag, meaning the full inflationary impact of the war will still be building as we enter 2027.

In any event, RPI-X is a discredited way to measure the rise in prices, and neither CPI nor RPI properly capture the actual costs that actual students face.

Charity begins abroad

That’s why when it works out how much to uplift stipends for Chevening Scholars, the FCDO uses a bespoke basket of CPI indices weighted to reflect what scholars actually spend their money on.

Housing carries 45 per cent of the weighting, food 20 per cent, fuel and light 9 per cent, recreational and personal services 15 per cent, transport 5 per cent and clothing 6 per cent.

The formula is applied annually using actual April-to-April price data – not forecasts – and in 2023/24 it produced a 9 per cent uplift, comfortably above the headline CPI figure of 8.7 per cent.

Apply that same basket to the most recent April inflation data and you get a “student inflation” rate of 5.5 per cent – driven by rents running at 6.3 per cent with a 45 per cent weighting. That is already double the 2.71 per cent maintenance loan uplift.

Factor in what the Iran war is about to do to the fuel and light component, and the gap will only widen.

Landlords facing higher utility bills in houses of multiple occupation tend to pass those costs into rents. Food prices rise as agricultural energy, processing and distribution costs increase. And students are disproportionately exposed to both – they are overwhelmingly renters, and they spend a higher share of their income on food than the average household.

The government, in other words, already has a methodology that acknowledges students experience inflation differently to the general population. It just reserves it for the international scholars it funds directly – while leaving domestic students pegged to a discredited forecast of a discredited index.

Cold comfort

When the government responds to the energy shock – and the political pressure means it will – the measures on the table may not reach students.

The Resolution Foundation has costed the options at around £3.75 billion a year – removing remaining policy costs from bills, a boosted Warm Home Discount, a Universal Credit uplift, or a social tariff providing a 21 per cent discount to households with gross incomes below £38,000.

Each fails students in a different way. The Warm Home Discount requires eligibility for means-tested benefits that full-time students cannot access. The UC uplift is similarly closed to most students. Removing policy costs from bills helps anyone on a standard variable tariff – but students in halls pay all-inclusive rents, students whose landlords hold the contract don’t see the saving directly, and students on fixed deals get nothing at all.

The social tariff is the most promising in principle, but the Resolution Foundation itself acknowledges that the income and energy data needed to administer it don’t currently sit on the same system – and there is no reason to expect students, invisible in the Households Below Average Income statistics because their fee loans inflate their apparent income, to be identifiable within it either.

Every cloud

The energy shock also interacts with the Plan 2 loans debate – but not in the way you might expect.

Start with what happens to graduates. Monthly repayments on a student loan are based entirely on what you earn – 9 per cent of everything above the threshold. The size of the debt makes no difference to what comes out of your pay packet each month. But the interest rate on Plan 2 loans can run as high as RPI plus 3 per cent. So when inflation spikes, the balance grows faster – even as repayments stay the same.

For the majority of Plan 2 borrowers, who will never clear the debt before it is written off after 30 years, this makes no practical difference to what they repay in total. But it makes the experience significantly worse. Watching a six-figure balance climb despite years of regular payments is demoralising – and it is about to get more so. That is the dynamic Starmer was responding to at PMQs in February.

Now consider what happens on the government’s books. The student loan book is an asset – the Treasury records it at the value it expects to get back in future repayments. When inflation rises, the model predicts graduates will repay more in nominal terms, so the asset gets revalued upward. The sum total of all the extra predicted repayments show up in the Department for Education’s annual accounts as an apparent saving on write offs previously charged – even though no extra cash has arrived.

Last time there was a big inflation spike, in 2022–23, this mechanism was so powerful that the student loan line swung from a £6.6 billion cost to a £9.4 billion gain. The loan book had never looked healthier on paper – even as graduates were being crushed by the interest charges that same inflation was driving. If the Iran crisis produces another spike, the same thing happens again.

That creates a perverse incentive. Rising inflation makes the government’s student loan position look better at exactly the moment it makes graduates’ lives worse. And it makes reform look more expensive – because any change that reduces what graduates repay also reduces the paper value of the loan book.

The IFS estimates that a package like the one proposed by Rethink Repayment could reduce the value of the loan book by £60–70 billion. It would show up in the national accounts as a cost. And with Reeves under pressure to find billions for energy support, that is not a fight she will choose to pick.