English funding review must reconsider interest rates, say MPs

Treasury Committee says government has failed to justify why student loan interest rates should exceed those prevailing in the market

February 18, 2018
Houses of Parliament, Westminster, government
Source: iStock

The government should reconsider high interest rates on English student loans as part of its major review of university funding, the Treasury Committee has urged.

In a new report on student loans, the committee says that the government’s justification that high interest rates of up to level of the retail price index (RPI) plus 3 per cent are “progressive” is questionable, given that graduates with very large salaries may pay less over their lifetime than lower-earning graduates because they can repay the loan quicker.

The government has provided no “persuasive explanation” for “why student loan interest rates should exceed those prevailing in the market, the government’s own cost of borrowing, and the rate of inflation”, the report states.

The committee also questions the government’s justification that an above-inflation rate on tuition-fee loans while students are still at university prevents the loan from being invested, given that tuition-fee loans are paid directly to the university.

The government should reconsider these high rates and abandon the use of the “widely discredited” RPI to calculate student loan interest rates in favour of consumer price index (CPI), the committee says.

The report also includes an analysis showing that £6 billion to £7 billion of annual student loan write-offs are hidden from the deficit because they are written off only after 30 years, and a further £6 billion could be written off through the sale of £12 billion of student loans over the next five years.

“As the writing-off of student loans will have no impact on the deficit for the next 30 years, the large and increasing level of money spent on higher education makes no difference to whether the government is meeting its [fiscal] target, and therefore [the government] escapes scrutiny,” it states.

Prime minister Theresa May announced a “major review of university funding and student finance” in England in October and is set to make a speech on the details of this review on 19 February.

Ms May’s appointment of two new education ministers last month was seen by policy experts as a move paving the way for a more radical review. Policy analysts have predicted that the review could potentially bring the return of the student numbers cap and a cut in funding per student.

The report from the Treasury Committee recommends that the government assess the case for the reintroduction of maintenance grants, claiming that maintenance loans are “at odds” with the government’s aim of removing barriers to access.

The review should also “include a fundamental rethink of its offer to part-time students” to stem sharp declines in part-time enrolment, should explain why £9,250 tuition fees are desirable, and should simplify the student finance system to ensure that it is more understandable, it says.

Nicky Morgan, the committee’s chair, said: “The use of high interest rates on student loans is questionable. The government has justified it on progressive grounds, but the committee remains unconvinced as high-flying graduates may pay less than graduates on more modest earnings. 

“No other persuasive explanation has been provided for why student loan interest rates should exceed those prevailing in the market, the government’s own cost of borrowing, and the rate of inflation. The government must reconsider the use of high interest rates on student loans as part of its review.”

Responding to the recommendations, Alistair Jarvis, chief executive of Universities UK, said that the funding system “needs to be better understood and to feel fairer to students”.

“More should be done to address students’ concerns about living costs so that no one is deterred from benefiting from a university education. New investment to reintroduce maintenance grants for the poorest students would be a positive step,” he said.


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