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Students: Loans

Volume 475: debated on Thursday 8 May 2008

To ask the Secretary of State for Innovation, Universities and Skills who took the decision to link the interest rate on student loans to the retail price index; and if he will make a statement. (202579)

Parliament determined the interest rate to be paid on student loans. The principle is that borrowers should repay the same amount, in real terms, as they borrowed. To achieve this, the rate of interest is the retail price index (RPI), although the method for determining the rate of interest varies depending on the type of loan.

Older 'mortgage style' loans are credit agreements under the Consumer Credit Act 1974. The interest rate is determined in accordance with the Education (Student Loans) Regulations 1998 which prescribe the rate of interest to be equal to the RPI so long as that index is published.

Income contingent repayment loans are ‘low interest loans’ exempt under section 16(5) (b) of the Consumer Credit Act 1974. Interest is calculated in accordance with the Education (Student Support) Regulations 2007, as amended, and is the lower of the rate which the Secretary of State determines is appropriate to maintain the real value of the loans (RPI), or 1 per cent. above the highest of the base rates published by the banks listed in Regulation 4 of the Consumer Credit (Exempt Agreements) Order 1989. Accordingly, there is potential for the interest rates for the two types of loans to differ but, to date, the RPI rate has consistently applied since 1990 to 'mortgage style' loans and since 1998 to income contingent loans.