The budget bill presented at the end of last year announced that the interest rate on student loans should be reformed. The then government intended to return to this in the budget bill for 2023, which has now been done. The government is proposing a reformed model for calculating the interest rate on student loans, here is what it means.
The proposed interest rate model goes against central parts of the fundamental purposes of the student loan system. The new interest rate model means that the state pays for the expected loss on student loans with increased income from interest. This differs from the current model where student loan credit losses are financed by appropriations in the state budget. The proposal develops the student loan in a direction where a greater payment burden is placed on the borrower.
Assignment to CSN
The government commissioned the Central Student Financial Aid Board, CSN, to develop a new model for calculating the interest rate on student loans. SFS was critical in consultation response and criticism from SFS, unions, authorities and others have not been taken into account and the interest rate model will be changed. The change will come into effect at the turn of the year.
Higher interest rates on student loans make the student loan more sensitive to socio-economic developments
Under the current interest rate model, the interest rate on student loans is determined annually by the government based on an average of the government loan interest rate over the past three years. The purpose of this interest rate model has been to make student loan interest rates less affected by the general economic situation.
Sources: Central Student Financial Aid Board, Interest for student loans granted after 1988. Government borrowing rate: historical values, Swedish Debt Office.
In the graph above, SFS can show how the interest rate on student loans has been regulated against the government loan rate over a twenty-year period. Here, the smoothing effect on the student loan interest rate in the current model becomes clear, where sharp changes in the government loan rate levels are smoothed out for the interest rate on the student loan. This smoothing effect has made the interest rate on student loans less sensitive to socio-economic developments.
The proposal for a new interest rate model that the government is now moving forward with is based on CSN's calculations, which assume an interest rate increase of 0,5 percentage points. This is therefore a mark-up on the interest rate, while the interest rate model will continue to be regulated against the government loan rate. In the diagram below, SFS has introduced an interest rate increase of 0,5 percentage points on the historical interest rate on student loans.
Sources: Central Student Financial Aid Board, Interest for student loans granted after 1988. Central Student Financial Aid Board, Assignment to develop a new model for calculating interest on student loans, ADM/2021:489. Government borrowing rate: historical values, Swedish Debt Office.
The government loan interest rate is in turn primarily affected by the economic situation. The National Institute of Economic Research states in its report on the economic situation in June 2022 that the Swedish economy is heading into a recession. We can then expect the government loan interest rate to increase. The interest rate on student loans would therefore likely increase in the coming years – even with the current interest rate model. With the new interest rate model, the increase risks being even greater.
The student loan – not an ordinary loan
Everyone with a student loan is affected by a new interest rate model, but what the exact interest cost will be for the individual after the increase ultimately depends on the size of the loan. A student who takes out a student loan to finance their studies cannot choose between different interest rate models. The interest rate on a student loan is fundamentally a different type of loan. It is therefore of great importance that the interest rate on the student loan is as predictable as possible.
Read more about the new interest rate model in SFS consultation response.