Author Mark Richards
An increase in inflation will lead to a sharp increase in the interest rate charged on student loans – and it may end up costing the country dear
“I have a First in Engineering: I am exactly the type of graduate the UK is supposedly desperate to retain. And yet I am almost certain to end up working abroad. Why? Because I voted to stay in the EU. Because I cannot see that I will ever be able to buy a house – and now because the rate of interest on my enormous student loan is going up. So my talents will be lost to the UK – and all my friends feel the same way…”
That is a direct quote from someone who graduated last year – and he is right. He is exactly the type of graduate the politicians will tell you the UK should produce and retain.
The grievance over Brexit is now well known – young, well-educated people overwhelmingly voted ‘Remain.’ The problems of the housing market are well-documented, with London mayor Sadiq Khan launching an inquiry into foreign property ownership in the capital, and anecdotal tales of 95% of the flats in a recent development in Manchester being bought by overseas owners.
…But now we have what seems for many students and graduates the straw that breaks the camel’s back – a hefty increase in the rate of interest charged on student loans.
Millions of students and graduates across England and Wales will shortly face a sharp increase in interest rates on the loans they took out to cover tuition fees and maintenance while they were at university, thanks to inflation increasing.
How is the interest on student loans calculated?
Every year, the official March inflation figures – using the Retail Prices Index (RPI) – are used to set the student loan rate taking effect from the following September. Inflation, as measured by RPI, was 3.1% in March, meaning that some students will be charged a rate of 6.1% on their loans.
While a student is at university interest is charged at RPI plus 3% – meaning that it would rise to 6.1% and that anyone with a student loan of say, £15,000 after their first year’s tuition and maintenance, would face interest costs of £915. Multiply this by three years at university and the student is graduating with a debt approaching £50,000 for tuition, maintenance and interest.
After students graduate, interest rates are then linked to earnings, and will be 6.1% for earnings of £41,000 and above, while those earning under £21,000 will pay interest of 3.1% – even though you do not start to make loan repayment until you earn more than £21,000 at which point you pay 9% of anything over the £21,000 figure.
Reaction to the increases
As you might expect, news of the increase focused attention on the rate of interest charged on student loans. The Intergenerational Foundation think tank – which researches ‘fairness between the generations – has just launched Parents Against Student Debt, and highlighted the fact that it is wrong to focus on the headline interest rate: that students will now pay much more in interest charges and repayment. The Foundation’s report on the burden of tuition fee interest was called “The Packhorse Generation.” It may not be as catchy as ‘Generation Rent’ but it accurately summarises the burden of student debt.
The figures bear this out: a student who earns £41,000 a few years after graduating will be repaying 9% of £20,000 (the difference between what they are earning and the £21,000 threshold). That means repayments of £1,800 a year – but with a debt of £50,000 and an interest rate of 6.1%, that means an interest of £3,050 leaving our theoretical student £1,250 more in debt at the end of the year.
Is this fair?
Not surprisingly, the National Union of Students has been quick to point out the unfairness of this – and it is difficult to argue with them. If we look back to the article we wrote a few days ago on credit card debt, here’s what we said.
Now the Financial Conduct Authority (FCA) has ordered the credit card companies to do more to help those people who are in ‘persistent debt.’ The FCA defines someone as being in [persistent] credit card debt if they have paid more in interest and charges than they have repaid (from the original borrowing) over an 18 month period.
So, on the one hand, the Government’s regulator is telling the credit card companies to take action if people have been in ‘persistent debt’ for 18 months: on the other, they seem happy to see talented graduates – the people the country most needs – with ever increasing amounts of debt.
Meanwhile, The Government presses ahead with plans to sell student loans
The Government is pressing ahead with its plans to sell off the student loan book to the financial markets. Announcing the move in February, Universities Minister Jo Johnson said that the move would have “no impact” on students with loans, but the National Union of Students have attacked the decision, calling it an “ugly move.” Sorana Vieru, NUS Vice President called it “privatisation by the back door,” saying,
“It is outrageous that bankers will profit off the back of students who took out loans because they had no other option.”
First to be sold will be the 2002-2006 student loan book, which had a face value of £4bn at the end of the 2014/15 financial year. However, the Government will not get face value for the loan book, because of the likelihood that many of the loans will never be fully repaid.
Two ways of looking at student loans
This increase in the interest rate for student loans will only intensify the debate regarding them. Is education a necessary investment on the country’s behalf? Or is it a commodity that can be purchased and – ultimately – sold on to the financial markets?
Students – like the graduate engineer we quoted at the beginning of this article – have been hit by a ‘triple whammy:’ a decision on Brexit that the vast majority did not agree with, a housing market that seems to be increasingly out of reach and the prospect of every increasing debt.
Contrast that with a recent move in America, where New York’s governor has announced a deal to scrap tuition fees in public universities and colleges for families earning up to $125,000 (£100,000) per year. Small wonder that the anecdotal evidence suggests that an increasing number of our students are ready to turn their backs on the country that educated them.