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The professor of public economies at the London School of Economics, Nicholas Barr, says that student loans are still largely misunderstood by the public. Speaking at an Institute for Fiscal Studies conference last week, the well-regarded LSE economist said that misconceptions about the student loans system mean that the government must tread very carefully when thinking about how quickly - and how high - to raise the undergraduate tuition fees cap.

He stressed that student loan repayments should be viewed as payroll deductions and shouldn’t be thought of in the same way as credit card-style debt.

Barr pointed out that the typical graduate job earnings trajectory over a full career would see someone paying £1 million in income tax and national insurance contributions over to the Government. He added, “Compared with that, £20,000 of Student Loan Company debt is really very small beer.”

Professor Barr thought that the fees review by the Government later in the year should endorse an increase of the fees, but that the increase should be small.

The economist said that lifting the rate of interest on loans was a good idea in order to cover the Government’s borrowing costs and that interest subsidies should be awarded to those in graduate jobs with low earnings. Another idea he proposed was a subsidy for those who find graduate jobs in the public sector - they could have a percentage of their student loans written off each year as an incentive to work in the sector.

The rate at which the Government borrows is higher than the rate of interest graduates pay so around a third of the money lent out to students is lost. The main ‘winners’ under the current system are the high earners in graduate jobs who pay off their loans rapidly. Professor Barr said that under the current system these costs mean that the Treasury are forced to ration the number of loans given leading to part-time students and UK postgraduates not being entitled to receive a student loan – a situation that he labelled as “inexcusable”.