Minister hints at student loan interest rate cut

THE interest rate on student loans may be cut to help bring down debt levels, the universities minister Jo Johnson hinted yesterday.

He admitted the system is ‘under review’ following criticism that it is saddling graduates with debts of up to £57,000.

In an interview with BBC Radio 4’s Today programme, Mr Johnson repeatedly refused to confirm that student loan interest rates would increase this autumn.

Under the current system, students pay interest rates based on the Retail Prices Index (1.6 per cent) in the preceding March plus 3 per cent during study. RPI in March this year was 3.1 per cent, so the interest rate for those studying in September will rise to 6.1 per cent.

While working, graduates face interest rates on their loans of RPI plus 0-3 per cent, depending on earnings.

Mr Johnson was quizzed about the looming rise, which presenter Mishal Husain said ‘stands out’ in ‘an age of low interest rates’. Responding, Mr Johnson said: ‘The mechanism enables it to rise to that level in September ... but as I said we want the student finance system to be fair and effective.’

He said of student loans: ‘They’re written off after 30 years and people only repay them once they’re earning a graduate salary of £21,000 so it’s entirely different to a classic commercial loan.’

Earlier this week, Downing Street dismissed the prospect of tuition fees being scrapped altogether as demanded by Labour. But Mr Johnson’s stance indicates that ministers are giving serious thought to how to ease the burden on students.

Writing in The Guardian yesterday, Mr Johnson argued the current system is ‘fair’ and that abolishing tuition fees would be ‘mind-bogglingly expensive’, but conceded that the political climate made demands for change difficult to ignore.

THIS paper has no quarrel with the principle that students should take out loans to pay for their higher education. The system works well in other countries – and contrary to the Left’s claims, it has improved access to Britain’s universities, not least for those from the poorest homes.

But the loan scheme now operating seems to offer the worst of all worlds.

With debts on graduation averaging more than £50,000 – and interest rates set to rise from 4.6 per cent to 6.1 per cent in September – it has stoked a burning sense of grievance among a whole generation.

Yet taxpayers are being short-changed, too. Indeed, the Institute for Fiscal Studies calculates that since debts are written off after 30 years – and borrowers need not start repaying them until they earn £21,000 – three-quarters of graduates are unlikely ever to pay off their loans in full. These include many EU students who return to their homelands after graduation, never to repay a penny of what they owe.

The psychological effects are also economically damaging. First there’s the disincentive to seek well-paid work (the higher the salary, the steeper the rates of payment). Then there’s the fact that a generation is growing up believing it’s normal to be heavily over-borrowed, and debts needn’t necessarily be repaid.

Can it really be beyond ministers’ wit to devise a deal for graduates, taxpayers and the country’s economic health, which doesn’t damage all three at once?