A group of MPs is calling on the government to review the measure of inflation used to calculate interest rates on student loans, describing the current system as “absurd”.
As part of an ongoing inquiry into the current student loan system, the Treasury Committee has called on the government to reconsider interest rates on loans and link interest rate calculations to the Consumer Prices Index (CPI), rather than the Retail Price Index (RPI), which is currently used.
The rate applied on interest repayments is RPI plus 3%. Since 2016, the rate of RPI has more than doubled from 1.6% to 3.3%, increasing the cost of borrowing for graduates.
RPI is usually higher than CPI, so by switching to CPI the overall amount of interest students repay on their loans would be reduced.
Rt Hon Nicky Morgan, MP, who is chair of the committee said it was only fair to use CPI, particularly as RPI is now considered an outdated measure of inflation and so no longer a so-called ‘national statistic’.
She said: "Government formulae affecting people’s incomes, such as pensions and benefits, often use CPI. Formulae affecting outgoings, including student loan repayments, often use RPI, which normally gives a higher rate of inflation. As the Royal Statistical Society said, this appears grossly unfair.”
The Department for Education acknowledged the flaws associated with using RPI in calculating interest repayments but still defended its use, in its response to the committee’s report.
Ms Morgan added: “Continuing to use a measure that it readily admits is flawed, on the grounds of consistency, is absurd; it guarantees that student loan interest rates will be consistently flawed."
The committee report also expressed concerns that, under the current system, higher-earning graduates would pay less for their loans than lower earners because they have the means to repay the debt faster.
The government has defended higher interest rates on student loans because it wants to discourage wealthier students from investing loans. However, the committee says it cannot see any justification for rates that exceed those available in the prevailing market, the government’s own borrowing costs as well as the rate of inflation.
The committee also wants to improve communication around student loans, through fears that terms including ‘loan’ and ‘debt’ put young adults off going to university.