Students paying £18,000 extra interest on their loans because of outdated rates

GRADUATES will pay as much as £18,000 extra on their student loans because an outdated measure of inflation is used to set their interest rates.

The retail prices index used by the company that manages the loans is almost always higher than the more modern and accurate consumer prices index.

It means the total £93billion debts of students in England and Wales incur £368million a year extra interest than if the consumer prices index (CPI) was used.

A student starting university in September who borrowed £45,000 and earned £41,000 in their first job will repay around £107,000 over 29 years using interest based on the retail prices index (RPI). If CPI was used, they would repay £89,000 over 26 years – £18,000 less.

The figures emerged in research for the Daily Mail by financial services company Hargreaves Lansdown.

Last week the Office for National Statistics called RPI a ‘flawed measure of inflation’. It is currently around one percentage point higher than CPI.

The finding that the Student Loans Company makes an extra £368million a year by using the RPI will pile pressure on ministers to revert to CPI to fix interest rates for the debts.

Tory MP Robert Halfon, chairman of the education select committee, said: ‘The high rate of interest on student loans is something that needs to be looked at very seriously. In America, the rates are much lower. If we are going to have student loans, we need a rate that is affordable.

‘At the moment, the interest seems to be clearly too high. Switching to the CPI would certainly be worth looking at.’

Neil Carmichael, a former Tory chairman of the committee, added: ‘I would support using the CPI. Such a move would especially be encouraging for those from more disadvantaged backgrounds.’ For years the Government’s measure of rises in the cost of living was RPI. But in June 2010 then-chancellor George Osborne said he would switch to CPI because it was more accurate.

He did not move everything to the new measure, however. He linked pensions and benefits to CPI, meaning they would increase more slowly so the Treasury would have to pay out less. But he decided that RPI would be used to calculate fuel bills, fuel duty and student loan interest rates.

Interest on student loans taken out since 2012 is set every September using the RPI inflation rate from March. From next term it will be 3.1 per cent, rising to 6.1 per cent for higher earners. The average graduate currently leaves university with £50,800 debt.

Interest starts being charged from the moment the student takes out the loan.

A Department for Education spokesman said: ‘Graduates only start paying back their loans when they are earning over £21,000 and loans are written off after 30 years.

‘Unlike commercial alternatives, student loans are available to everyone, regardless of background or financial history.’