Bill gives ministers ‘free rein’ over interest rates on student loans

New legislation allowing the government to apply higher interest rates to student loans grants ministers “free rein” to raise charges in the future and gives no protection for those from poorer backgrounds, a university group has warned.

January 28, 2011

The changes – published yesterday as part of the government’s Education Bill – allow the coalition to implement its plan of charging an interest rate of up to 3 per cent above inflation on loans taken out after 2012-13.

It plans to levy this maximum charge on loans while students are still at university. The charge will also apply to graduates earning more than £41,000 a year. Graduates earning less will see the real interest rate taper off to zero, according to the plans announced last year.

The legislation published yesterday does not specify any cap on the interest rate. The bill says only that it should be “no higher than those prevailing on the market” – allowing any future government to change the system further.

Pam Tatlow, chief executive of Million+, which represents many post-1992 institutions, said the plans “give the secretary of state free rein to set uncapped and commercial rates of interest on student loans”.

She added that there was “a huge risk that future graduates will face even higher interest rates as the government scrabbles to recoup its losses on a loan scheme that will add £13 billion to public sector net debt by 2015-16”.

John Denham, the shadow business secretary, said: “It would be wrong for ministers to take the power to make significant changes to interest rates without getting Parliamentary approval.”

The bill also makes changes that would allow the government to fix tuition fees for part-time students at a pro rata level of what a university charges full-timers. Previously fees for part-timers were exempt from the cap.

A spokesman for the Department of Business, Innovation and Skills said: “The bill will enable us to implement the remaining elements of the student finance reforms and set by regulation the progressive repayment system offering protection to low earning graduates, which we announced in November.

“These regulations will be subject to scrutiny by Parliament in the normal way.

“The bill also provides extra protection for part time students by prescribing the maximum fee they can be charged. We will publish the detailed regulations as the bill progresses.”

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