COMMONS

Government must reconsider high interest rates on student loans

18 February 2018

The Government is due to undertake a major review of university funding and student financing. In its unanimously-agreed Report on Student Loans, the Treasury Committee makes a series of recommendations, which the Government should address as part of its review.

Key recommendations

  • Justification for high interest rates on student loans is questionable
  • Above-inflation rate on tuition fee loans whilst student is studying should be reconsidered
  • Abandon use of RPI in favour of CPI to calculate interest rates
  • Assess the case for re-introducing maintenance grants
  • Explain why the higher than expected level of tuition fees are desirable
  • Simplify the system to ensure that student finance is better communicated
  • Fundamentally rethink offer to part-time students as numbers have declined sharply
  • Sharia-compliant student loans should be introduced as soon as possible

On the impact of student loans on the public finances, the Report concludes:

  • £6–7 billion of annual student loan write-offs are hidden from the deficit
  • Over £6 billion could be written off through the sale of £12 billion of student loans over the next five years

Recommendations for the Government to consider as part of its review

Interest Rates

The Government has argued that the interest rates on student loans are progressive. However, graduates with very large salaries may in reality pay less over their lifetime than lower-earning graduates as they can repay the loan quicker, and therefore pay less interest. The Committee has not heard a persuasive explanation 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 has justified high interest rates being applied to loans whilst students are still at university as it prevents the loan from being invested, even though tuition fees loans are paid directly to the university. The Government should reconsider the punitive measures of charging positive real interest rates whilst students are still at university.

RPI was de-designated as a National Statistic, and it has been roundly criticised as a flawed measure of inflation. The Government should abandon the use of RPI to calculate student loan interest rates in favour of CPI.

Maintenance Loans and Grants

The Government has said that maintenance loans are not intended to cover a student’s living costs in their entirety. Therefore, students who lack access to additional sources of income, such as through parental contributions, can be priced out of a university education. This is at odds with the Government’s aim of removing barriers to access, and the Government should address this by, amongst other things, assessing the case for the re-introduction of maintenance grants.

Tuition Fees

The incentives for students to choose courses that command smaller tuition fees are weak. The Government naïvely assumed that in advance of the 2012 reform to tuition fees, which increased the cap to £9,000, prevailing tuition fees would be around £7,500. Tuition fees are almost universally at the increased cap of £9,250, so the Government should explain why the higher levels of fees are desirable.

Communication

Student loan debt is only repaid when earnings surpass a given threshold, and it’s written off after a defined number of years. It shouldn’t be thought of as a typical debt, and terms such as ‘loan’ and ‘debt’ could serve as deterrents for young people considering applying to university. The Government should review how to simplify the system to ensure that student finance is more understandable.

Part-time Students

Between 2008-09 and 2015-16, the number of part time students fell by 47 per cent, from 590,000 to just over 310,000. This sharp decline – brought about in part by the 2012 reforms – is regrettable. The Government’s review should include a fundamental rethink of its offer to part-time students. It should ensure that part-time study is a credible option as part of lifelong learning and retraining, and that it provides access to higher education for those who are unable to study full-time.

Alternative Student Finance

Student loans are subject to a positive real interest rate, meaning they are not Sharia-compliant, which could deter some prospective students from participation in higher education for religious reasons. The Government should make use of Islamic Finance expertise both within the Government and externally to ensure than an alternative finance model is introduced as soon as possible.

Student loans and public finances

As student loans are written off after 30 years, a student loan issued today will have no impact on the deficit until 2048, even though the Department for Education (DfE) recognises that a high proportion of it will never be paid back. This allows the Government to escape scrutiny. The DfE issued £13.6 billion of student loans in 2016-17, and based on the current RAB charge (the proportion of student debt that the Government expects to write off) of 40-45 per cent, £6-7 billion of annual write offs are missing from the deficit – the equivalent of the entire NHS capital budget. Its inclusion would increase the deficit for 2016-17 by 13 per cent, from £45.5 billion to over £51 billion.

The Government sold £3.5 billion of student loans last year for £1.7 billion, a 51 per cent write off. The Government plans to sell off a further £12 billion of student loans over the next five years. If the write-off rate remains the same as the previous sale, over £6 billion of student loans could be written off without impacting the deficit.

Chair's comments

Commenting on the Report, Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee, said:

"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.

The Government has said that maintenance loans aren’t intended to fully cover a student’s living costs. If a student can’t access additional sources of income, they may be priced out of university. The Government should assess the case for re-introducing maintenance grants to help remove barriers to access for potential students.

The Government should also consider how to simplify the student loan system to ensure that student finance is more understandable, and why a tuition fee rate higher than it expected is desirable."

Further information

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