The Mail on Sunday

JUST WHEN WILL THEY LEARN?

As students are racking up debts of £60,000, the Government is facing pressure to reduce the 6 per cent interest rate on loans

- By Sally Hamilton

PRESSURE is mounting on the Government to cut the ‘outrageous’ interest charged on student loans. Graduates now face an eye- watering rate of 6.1 per cent — 3 per cent plus March’s Retail Prices Index of 3.1 per cent — while they are still studying.

This is 24 times the 0.25 per cent Bank of England base rate, and students start incurring interest the moment they step through the lecture room door.

This year’s undergradu­ates face a mightier debt burden than their predecesso­rs – made worse by a toxic cocktail of tuition fees rising from £9,000 to £9,250 a year, the replacemen­t of maintenanc­e grants with loans for the worst off, plus the sharply higher rate of inflation, which determines the rate of interest charged. Students taking out loans for a three-year course – plus borrowing for living costs – can now expect to graduate with debts of at least £50,000. But for poorer undergradu­ates with higher maintenanc­e loans this rises to £57,000.

Even t he vice chancellor of Oxford University, Louise Richardson, last week described the 6.1 per cent interest rate as ‘hard to justify’. Universiti­es UK, the voice of universiti­es nationwide, has also called for the interest rate to be cut and non- repayable maintenanc­e grants to be brought back.

The matter is so serious it will be raised in the House of Lords tomorrow by Lord Hunt of Kings Heath, Labour spokesman for higher education. He told The Mail on Sunday: ‘I believe it is time to alleviate the pressure on students, and I will be pressing the Government to cut the rate of interest as a start.’

Many students do not realise the cost of the loans. Research by website Savethestu­dent suggests three quarters do not know what interest rate their loan is attracting.

On graduation, they will pay interest of RPI plus between zero and three percentage points, depending on their earnings. This is calculated on a sliding scale so a graduate earning less than £21,000 would pay 3.1 per cent, while one earning £41,000 or more would pay 6.1 per cent – the same rate as when they were studying.

Lobby group Parents Against Student Debt says someone going to university this month could be landed with debt on graduation of £60,756 if attending a London university. This would bloat to £141,296 over 30 years if no repayments were made and student fees rise at a 2.8 per cent rate of inflation.

COMPOUNDIN­G PLOY

THE debt grows fast because interest is compounded monthly – with interest charged on interest.

For this year’s university entrants compoundin­g means they will clock up £5,800 in interest even before they receive a degree certificat­e.

Estelle Clarke, a former City lawyer and advisory board member of think-tank the Intergener­ational Foundation, describes compoundin­g as a ‘cunning way of extracting more money from student borrowers’. She says this is not explained properly when loans are taken out – and is a practice rarely seen in the commercial world.

THRESHOLD RUSE

GRADUATES only start repaying their loan when earning £21,000 a year, at a rate of 9 per cent on earnings over this amount.

Not only has the interest rate risen, but the Government has gone back on promises to raise this earnings threshold annually in line with wage inflation. Until 2021 it will be frozen at £21,000 – pushing thousands more low-earning graduates into the repayment net.

GOVERNMENT DEFENCE

THE Department for Education says the system is fair, especially for poorer students, and that it regularly monitors interest rates. A spokesman says: ‘The annual rate of interest remains lower than the Bank of England’s equivalent benchmark rate for unsecured personal loans.

‘Those earning less than £21,000 a year repay nothing at all, and debts are written off after 30 years.’

But Clarke, who is among those demanding the system be overhauled, says: ‘It is disingenuo­us of the Government to rely on the defence that many student loans will be “written off” after 30 years. This claim disguises the fact that many loans would not need to be written off if the Government charged a fair rate of interest – and interest was not compounded monthly.’ Lord Hunt says that a concession linking interest to the more commonly used and lower Consumer Prices Index rather than the discredite­d RPI would be a welcome first step. He would also like interest charges to apply only after graduation, rather than treating all current students as if they were already earning £41,000 a year. A mate y Do ku, at the National Union of Students, says: ‘ The outrageous­ly high interest rates on student loans shows the Government’s disregard for concerns of ordinary students, their families and taxpayers, who will have to pick up the bill for unpaid student debt. The current system works for no one.’ Insurer NFU Mutual has launched a calculator to help parents estimate how they may need to supplement their child’s basic living costs at university. Go to nfumutual.co. uk/university-fund-calculator.

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 ??  ?? Anna Hodgekiss made unnecessar­y payments for ten months ALERT:
Anna Hodgekiss made unnecessar­y payments for ten months ALERT:

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