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Student Loans: Interest Rates

Volume 783: debated on Monday 11 September 2017


Asked by

To ask Her Majesty’s Government whether they plan to reduce the 6.1% rate of interest to be charged on student loan debt from September 2017; and if so, how.

My Lords, student loan interest rates vary with income: 6.1% is the maximum rate, and many students will be charged less than this. Borrowers in repayment who earn under £21,000 pay 3.1%. Borrowers are protected, and repayments are linked to income, not interest rates or the amount borrowed. Our student finance system ensures the costs are split fairly between graduates and the taxpayer, and does this while helping more young people to go into higher education than ever before.

My Lords, the noble Viscount failed to mention that the moment a student gets to university, the 6.1% rate applies to them. At the end of three years, it has been estimated that the average interest added, at 6.1%, will be £5,800. Why are the Government determined to put students into even more debt than they are now? Why is RPI being used as the rate of inflation when the Government themselves have rejected RPI when it comes to benefits and pensions? Indeed, it is only students and railway passengers who are penalised by the use of RPI. When will the Government get real and review the rate of interest, as a first stage towards reform of our university fee system?

My Lords, the details of the scheme continue to be kept under review, but the student loan system is working well. The Government’s reforms to the undergraduate student finance system have ensured that it is financially sustainable for the taxpayer in the long term, while enabling those with the talent to benefit from a higher education to do so. Young people from the poorest areas are 43% more likely to go to university than they were in 2009-10. This is a very good step in the right direction.

My Lords, can my noble friend explain why the Government cut the discount rate—their own measure of the liability for the public—arguing that they were able to borrow money more cheaply, and at the same time hugely increased the interest rate that students have to pay? Given that three-quarters of students do not pay their student loan back in full, those who do will be paying back several times what they actually borrowed.

The interest rate system ends up being a subsidy. If we think of one-third of students going to university, a third is written off. The whole complex system is designed to ensure there is an effective balance.

My Lords, could the Minister explain how we have got to a position whereby once graduates earn over £21,000, they effectively face a marginal tax rate of 41% after loan repayments are included, irrespective of any rise in the interest rates being charged?

To answer the question about the £21,000, the issue was discussed at length during the passage of the Higher Education and Research Bill. When the current system was introduced, the threshold would have been around 75% of the projected average earnings for 2016. Since then, updated calculations based on ONS figures show the figure is now 83%, reflecting weaker than expected earnings.

I have those figures but I will have to write to the noble and learned Lord with them; they are in my facts somewhere.

My Lords, when student loans were introduced by the Government, students were promised that the threshold of £21,000 would increase in line with average earnings. Why has that commitment not been delivered?

That is because it is not necessary to do so. The proportion of borrowers liable to repay when the £21,000 threshold took effect in April was significantly lower than could have been envisaged when the policy was introduced. The threshold would now be set at £19,000 if it were to reflect the same ratio of average earnings.

My Lords, I think it is the turn of the Conservative Benches, but I hope we can also fit in a question from the noble Lord, Lord Adonis.

I thank my noble friend. Is there any merit, while the Minister is reviewing interest rates, in giving consideration to CPI, which of course is lower than RPI?

We believe that RPI is more appropriate than CPI for student loans. It takes account, among other things, of changes in mortgage interest payments and council tax, which, I may say, are typical expenses for graduates that are not included in the calculation of CPI.

My Lords, I am not sure about reforming universities but I certainly think we should reform the way in which we conduct Question Time in this House.

Does the Minister think it justifiable for any vice-chancellor to be paid more than £300,000 a year?

I made the position clear on vice-chancellors’ pay the other day in the House. Although the Government do not wish to interfere, my colleague in the other place, Jo Johnson, has made it quite clear that universities must have restraint in the pay offered to vice-chancellors and, indeed, to other senior positions.

My Lords, if we could come back to the Question, it was reported at the weekend that Mrs May was casting around for ways to ease the burdens on students. Would an obvious way of doing that not be to reduce interest rates to something more like the rates that banks were paying to investors?

There have been rumours in the press about a review but I cannot really confirm that at all. We believe the balance is right between making sure that the interest rates are right and that we encourage people to go to university.

My Lords, when we introduced student loans back in the 1980s, we did so because the Treasury would not accept a student tax. It would be a much better way of dealing with this problem because it is not strictly a loan; it is a lump of government expenditure that is passed from the Department for Education to a student, who then passes it on to the university. That is the amount that I believe a student should pay without any interest at all, and that is what would happen if we had a student tax in this country.