Loans misery for students as interest rises to 6.3%
GRADUATES face more debt misery after it was revealed yesterday that the interest rate on their university loans will rise to 6.3 per cent.
The increase in the upper limit from September has raised concerns that student debt will grow at a faster pace.
A rise in the Retail Prices Index, the measure of inflation to which student loan rates are pegged, was blamed for the increase from 6.1 per cent.
It comes amid continuing concern over the debt burden on students and the high interest rates on their loans while the Bank of England base rate remains at just 0.5 per cent.
There is also a deepening row over whether students are getting value for money from their degrees as most tuition fees are now £9,250 a year. Those who take out loans to cover both tuition and living costs are graduating having borrowed up to £50,000.
The announcement came on the day inflation dropped to a year low of 2.5 per cent and in the same month ministers said graduates would not have to start repaying loans until their salaries hit £25,000.
It also follows a vow by Labour leader Jeremy Corbyn to abolish tuition fees in the run-up to last year’s general election.
The pledge, which would have saved graduates tens of thousands of pounds over their lifetime, is thought to have lost the Tories votes.
Experts accused Mr Corbyn of being dishonest as axing fees would leave universities struggling financially and create a huge burden for taxpayers.
They also said getting rid of fees would mean fewer people going to university as it would mean a cap on state subsidised places.
The Tories have responded by raising the threshold at which repayments start, from £21,000 to £25,000. It means graduates earning less than this will pay nothing while the remainder will make smaller contributions.
But the Government also had the option of lowering the interest rate. Critics described yesterday’s rise as a ‘poor deal’ for students and taxpayers.
Amatey Doku, vice-president of the National Union of Students, said: ‘Interest rates at 6.3 per cent represent an increase which, although a seemingly small degree, adds to the huge psychological burden that debt has on many students and graduates. Absurdly high interest rates are only a small part of the student debt problem which already leaves students from disadvantaged backgrounds with up to £50,000 of debt, most of which is never paid off.
‘The current funding model continues to represent a poor deal for students, their families, and the taxpayer.’
Jake Butler, from the advice service Save the Student, added: ‘It’s yet another increase on an already astronomical percentage.’ The student loan rate is calculated as the Retail Prices Index, which was 3.3 per cent last month, plus 3 per cent to make 6.3 per cent, a figure much higher than many commercial loans.
The change affects students in England, Wales and Northern Ireland who took out loans from 2012 onwards. The previous rise was from 4.6 per cent in 2016 to 6.1 per cent in 2017.
Ministers insisted the latest increase will have no impact on monthly repayments as graduates repay 9 per cent of earnings over £25,000, regardless of how large the debt is. Interest is also charged on a sliding scale, with only those earning over £45,000 paying the maximum of 6.3 per cent. Earners below this level pay interest at 3.3 per cent. Ultimately, many will never pay off their loan as any sum remaining is wiped out after 30 years.
A Department for Education spokesman said the higher repayment threshold will save 600,000 graduates up to £360 a year. He added: ‘Very few people are likely to be affected by the [interest rate] increase. Only borrowers earning over £45,000 are charged the maximum.’
In February, Theresa May unveiled a review to look at if the way student loan interest is calculated needs to change.
‘Funding model is a poor deal’