Pegging student loan interest to the RPI is unfair

Using the Retail Price Index to calculate student loans only leaves students with more debt and the government with a future income shortfall, argues Will Ing 

April 19, 2018
Masked man shackled by 'Student Loans' ball and chain
Source: Alamy

The Office for National Statistics has revealed that the Retail Price Index – one of many measures of inflation – rose by 3.3 per cent in the year to March 2018. The figure is significant because it is basis for the amount of interest that will be paid on student loans in 2018, both for those that went to university before 1998 – and those that have gone to university since 2012.

Those with student loans should be displeased by the figure. The 3.3 per cent rate is not only an increase on last year, but is more than double the RPI figure of March 2016. Current students will pay 6.3 per cent interest on their loans this year – considerably more interest than received in a typical high street bank account.

It is fair that those with student loans should be asked to pay interest in-line with inflation. If they did not, then student loans would become smaller in real terms, as wages and the price of everyday items increased. However, the RPI is a manifestly unfair way with which to calculate inflation. The official measure for inflation, since 2003, has been the Consumer Price Index. 

The UK’s national statistician, John Pullinger, said: “I believe that the RPI is not a good measure of inflation and does not realistically have the potential to become one. I strongly discourage the use of RPI as a measure of inflation as there are far superior alternatives.”

In 2013, the RPI was removed as a national statistic, after a report from the UK Statistics Authority found that it failed to meet international statistical standards. In 2015 the Institute for Fiscal Studies called on the RPI to be scrapped.

It is mathematically impossible for the CPI to be smaller than the RPI, meaning that inflation-tracked interest on student loans will always be higher than the actual rate of inflation. The CPI rose by 2.5 per cent in the year to March 2018, 0.8 per cent less than the RPI. This may not sound like much, but it adds up.

Having studied in London for the past four years, I have accrued debt of roughly £56,000. Using the official inflation rate, the interest added to my debt this year would be £1,400. However, as my interest is calculated using the RPI, the figure added will instead be £1,848 – some £448 more. Over the course of decades, the use of RPI instead of CPI will, unless changed, mean that millions of people will be thousands of pounds more in debt.

Perhaps the best defence for continuing to use RPI to calculate interest for student loans is that most people will not pay off their debt anyway. (Student loan debt is written off 30 years after one starts paying it off.) True though this may be, it is a poor reason to spurn reform.

Firstly, those that manage or come close to paying down their debt will be paying decade’s worth of unfairly calculated interest. Even for those who do not fully pay back their debt, carrying a large and burgeoning debt is unpleasant.

Secondly, as the government owns our debt the money we owe is part of the government’s long-term projected income. The more interest added to student debt now, the more future income the government projects. But if most of that money is never paid back, then at some point in the future there will be a shortfall in government income. And it is today’s students and recent graduates that will bear the brunt of there being less public money than predicted as well as the extra taxes or less public spending that it will entail.

It is possible to change how the RPI is calculated. In March, Bernard Jenkin, chair of the Commons Public Administration and Constitutional Affairs Committee which scrutinises the Office for National Statistics, called for a parliamentary review of the UK’s inflation measures. Any review would undoubtedly highlight the weakness of the RPI. However, attempts to reform the RPI could be undermined by RPI-linked bondholders, who would lose out if RPI was brought more in-line with the CPI.

The decision to change the salary at which students will start repaying their loan from £21,000 to £25,000 was a welcome one, but many feel the government still has a long way to go in helping students and recent graduates. In February the government announced it will review the current student loans system, perhaps they could start with severing the link between RPI and student loan interest.

Will Ing is a graduate of Soas, University of London currently studying a master’s in newspaper journalism at City, University of London.

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