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Student Loan Interest Rates

Volume 837: debated on Wednesday 27 March 2024


Asked by

To ask His Majesty’s Government what assessment they have made of the level of interest being charged on student loans.

My Lords, our recent reforms, implemented in August 2023, ensure that the student loan system is fairer for taxpayers and for students. New students on the new loan terms will benefit from a reduction in interest rates to the retail prices index only. This ensures that they will not repay, under those terms, more than they originally borrowed when adjusted for inflation.

My Lords, unlike residents of Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Greece, Italy, Norway, Scotland and Spain, people living in England pay university tuition fees—a major cause of the student debt of more than £206 billion and rising. The average debt of £45,000 currently attracts a 7.7% compound interest rate and is rising. Can the Minister explain why the interest rate on student debt is higher in real terms than the equivalent interest charged on a mortgage?

I think the noble Lord knows the answer to his question: it is not appropriate to compare mortgages with student debt, which is unsecured and expires and does not have to be repaid in full. The noble Lord shakes his head, but he can do the maths: a mortgage is asset-backed, and one has to repay it; a student loan is not asset-backed and expires. As the noble Lord knows, under the current system, the vast majority of students do not repay it in full.

My Lords, I declare that I have a number of children and grandchildren who are suffering from the ridiculous regime of charging students interest at a stupid rate, when the Government could have controlled that debt book. Does my noble friend not agree that it would be far better for the youth of our country and the future of our own Government if we put that debt book back on to a public works loan board or something equivalent? The level of intergenerational unfairness in this country is outrageous, and we are fuelling it. It is ridiculous.

I am afraid I cannot agree with my noble friend. The debt repayment levels are dependent on income, and, as I said to the noble Lord, Lord Sikka, we expect that under the new plan 5 loans 61% of new full-time borrowers will repay their loans in full, with the balance being subsidised by the taxpayer. A recent graduate on a starting salary of £26,000 will repay £7 a month.

My Lords, the student loan system is renowned for bad repayment rates and, as has just been mentioned, high interest rates. Would it not be the right time to get some system that the Government back and is on the government books? That is what needs to be done to get us away from the accounting procedure. It is ridiculous. I declare an interest as somebody who has a daughter who is coming up to her finals.

I think the noble Lord is aware that there is a cap on the interest rate, but I remind the House that interest rates do not impact on the income of borrowers. Repayments are a percentage of income above a repayment threshold, irrespective of interest rates.

My Lords, on 18 March, on behalf of Hong Kong Watch, of which I am a patron, I chaired a meeting here in your Lordships’ House about the launch of a new report concerning the effect of international fees on the children of some of the 160,000 BNO passport holders who have arrived and been given such a welcome in the United Kingdom. Will the Minister undertake to speak to the right honourable Gillian Keegan, the Secretary of State, about the letter she has now received pointing out the lack of equity in charging BNO passport holders up to £50,000 each for five years if they study medicine, or £25,000 a year if they are at a Russell group university, and look instead at the Scottish model and also at the position of EU students on pre-settled and settled rates, who are able to qualify for home student fees after three years?

I would be delighted to talk to my right honourable friend the Secretary of State, but, as the noble Lord knows, this is a timing issue in terms of getting settled status. I appreciate that there is a lag in that happening.

My Lords, what assessment have the Government made of the link between graduate debt, which inflates the debt-to-income ratio, and the inability of the younger generation to buy homes of their own?

I come back to my earlier answer: we have a system in which it is very clear that above a certain threshold, 9% of income goes to repaying part or all of a graduate’s debt. The overall package, obviously, in terms of affordability of mortgages and housing, is dependent on many issues, of which graduate debt is one.

My Lords, the Government’s excellent recent reforms to the student loan book have significantly improved its affordability to the taxpayer, with less than a third now expected to be written off. Given this, and given the funding crunch facing universities—which will be worsened if the Government take a hatchet to the graduate route, by the way—does my noble friend the Minister agree with me that it is time to allow universities to increase fees in line with inflation for those that can demonstrate they are delivering great outcomes for students, as assessed by the teaching excellence framework?

As my noble friend touched on, the Government are trying to balance, or triangulate, a number of things. One is affordability for students, hence the freeze we have had for seven years on fees. Another is addressing poor-quality provision—at the other end of the issue from the one my noble friend raises—through the new Office for Students regime. In relation to motivation, reward and recognition for the highest-performing institutions, a review of allowing indexation of fees based on the TEF is not under consideration currently, but I will say that having a high-quality teaching framework does allow for strong recruitment and research income.

My Lords, has the Minister considered the level of graduate earnings currently and the threshold she refers to? Leading on from the question from the noble Lord, Lord Johnson, in light of those two parameters, have the Government thought of increasing the level of fees so that those who go on to very high earnings can pay a proportionate amount, making it more progressive than the flat rate that now applies?

Of course, those who go on to much higher earnings end up repaying much more than those on lower earnings, but no additional consideration is currently being given to the suggestion from the noble Baroness.

My Lords, the Student Money Survey last September found that 18% of students had used a food bank in the 2022-23 academic year, up from 10% in 2021-22. The annual inflation rate peaked at 9.6% in the year to October 2022, yet for the 2022-23 academic year, the value of student maintenance loans for living costs rose by only 2.3%. What are the Government doing to ensure that students can focus on their studies and not worry about how they are going to feed themselves?

I understand why the noble Baroness raises this point, and I am aware of the concerns around affordability. We have continued to increase the maximum loans and grants for living costs each year, with the most support going to students from the lowest-income families, and benefits for lone parents and disabled students. We have made wider cost of living investments as a Government and, in addition, have made £260 million of student premium and mental health funding available for the 2023-24 academic year.

My Lords, as ever, I declare my interest as a teacher. Does the Minister agree with me that this is part of a wider conversation that too many students these days are being sold the dream of a degree, when they would be much better suited to the route of education within a workplace or an apprenticeship?

The noble Lord is right, and that is why we are focusing on improving both the quality and the quantity of careers advice to students at school. We are doing a lot of work through the Unit for Future Skills to predict the skills needs and gaps in the economy. At levels 4 and 5, as well as at level 6, being an undergraduate level, there are tremendous opportunities for our young people.