High student loan interest rates deemed ‘questionable’ by MPs

18 February 2018
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The government must consider lowering the high interest rates it charges on student loans, a cross-party group of MPs has said.

The Treasury Committee has weighed into the debate on student financing, asking the government to look again at the “questionable” current system, saying the charges could lead to low-earning graduates paying more than high earners.

Part of the Committee’s recommendations include abandoning the use of the retail prices index (RPI) rate to calculate loan rates in favour of the consumer prices index (CPI), which is usually lower.

It says the current rules are tilted in favour of high-earners, as they will repay their loans more quickly and thus be charged less interest than poorer graduates.

The Committee adds that there is no reason for the interest rates charged to students to exceed the cost of borrowing on the open market.

Today’s report follows a National Audit Office (NAO) report in December 2017, which slammed universities for ‘mis-selling’ poor value courses.  

‘Use of high interest rates on student loans is questionable’

Nicky Morgan MP, chair of the Treasury Committee, says: “The Treasury Committee’s report on student loans has made a series of recommendations, which the government should consider as part of its review of university funding and student financing.

“The use of high interest rates on student loans is questionable. The government has justified it on progressive grounds, but the Committee remains unconvinced as high-flying graduates may pay less than graduates on more modest earnings.

“No other persuasive explanation has been provided for why student loan interest rates should exceed those prevailing in the market, the government’s own cost of borrowing, and the rate of inflation. The government must reconsider the use of high interest rates on student loans as part of its review.”

Student finance system ‘should be simplified’

In its wide-ranging report, the Treasury Committee also suggests that the government simplifies the student finance system to make it easier to understand. In addition, it wants policymakers to assess whether maintenance grants should be reintroduced, as it believes the present system presents unnecessary barriers for poor students.

The dramatic increase in tuition fees instigated by the Conservative-Liberal Democrat coalition government in 2012 has also been placed under the microscope. The report says that this change has failed to create a market between universities, with the vast majority of courses simply charging the maximum annual fee – currently £9,250.

But between 40% and 45% of these loans will never be fully repaid, which the Committee says the government should include in the country’s overall deficit. The report argues that £6-7 billion of annual write-offs are currently missing from the deficit – something which would cover the entire NHS capital budget each year.

But as this deficit will not be realised for 30 years – when these unpaid loans are written off – the government is currently escaping scrutiny of its decision making.

The Committee adds that the government must also address the falling numbers of part time students and make studying less financially demanding for these people.

However, the report approves the continued sales of student loans to third parties, saying this is a financially appropriate decision to make.

Comments

In reply to by anonymous_stub (not verified)

It seems grossly unfair that students who are striving to improve their lives and work towards a decent future, have to pay a fortune to do this. Yet there are a lot of young people who are prepared to sit on their backsides and let the government/taxpayer 'keep them'. The government sends billions on aid to other countries - so how about spending a chunk of these monies on our students here instead. Support them, not impede them by tying them up in financial chains before they even start working.

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