Philip Hunt on the scandal of high interest rates for student loans
Just what does the government have against university students? If trebling tuition fees, and then further raising the limit to £9,250 is not enough, they’ve now hiked the rate of interest on student loans by up to a third.
English undergraduates already pay the highest fees in the industrialised world. Even Universities UK, whose members and their Vice Chancellors have benefited the most from this sorry state of affairs, have urged Ministers for a review.
Monthly student loan repayments are linked to income not interest rates, so the main impact of the hike will be to prolong the repayment period and run up a massive debt. The Institute for Fiscal Studies (IFS) calculate that students from the poorest backgrounds will accrue debts of £57,000 for a three year degree.
Outstanding debt is cancelled after 30 years and the IFS has estimated that 75% of former students will never repay the full amount. But over such a long period, significant payments have to be made with such debt often being the root of anxiety and depression.
The interest rates vary in relation to when a graduate studied and how much they earn. Since 2012, they have been fixed at 3% plus RPI, which since March has been 3.1%. From this month therefore, current students (along with some former ones) will be paying 6.1%.
Those with salaries from £21,000 to £41,000 or more will pay back their loan and accrue interest on a sliding scale – with the highest at 6.1% per cent, up from 4.6%. At the same time, those starting university between 1998 and 2011 will only be charged 1.25% per cent, and based on whichever is lowest: RPI or the Bank of England rate plus 1%. And students who entered university before 1998 will see their rate doubled to (3.1%) because it is tied to RPI – albeit still half of what post-2017 students will pay.
The use of RPI as the rate setter has become more questionable (as with its application to rail fares). Not least as CPI, used to calculate benefit and pension increases, is a much better measure of inflation. Indeed, Director-General of the Office for National Statistics, Jonathan Athow has labelled RPI: “a flawed measure of inflation with serious shortcomings.”
As a result, students starting this year will accrue an average of £5,800 in interest charges by graduation. Debt will increase and even less will be paid off at the end of 30 years. Meanwhile, universities will carry on regardless. So, in the Lords today, I will ask the Minister if – as a starting point for a major reform of this failing system – the government will not only cut the rate of interest but also cease its application to those students still at university.
Lord Philip Hunt of Kings Heath is a member of Labour’s shadow ministerial team in the House of Lords. He tweets @LordPhilofBrum
Published 11th September 2017