Minimum repayments 'boost debts'

August 13, 2004

Graduates on low incomes face an ever-growing burden of debt under the system of making minimum payments on student loans that may not cover the interest charges, it was claimed this week.

Norman Lamb, Liberal Democrat MP and member of the Treasury Select Committee, said that one of his constituents was trying to repay her £11,000 loan at £15 per month but was being charged £25 each month in interest.

Mr Lamb said that the committee had recently criticised credit card companies for a similar practice of allowing people's debt to rise, and he urged ministers to rethink the system.

Ironically, the student loans system could become the centrepiece of Tory higher education policy under proposals - which were leaked last week - to abolish tuition fees and cover the cost by raising the interest rate on loans.

But, in the light of Mr Lamb's concerns, the Government said student loans were a "world away" from commercial debt and stressed that the Treasury subsidised the system rather than profiting from it.

A spokesman for the Department for Education and Skills said: "Unlike commercial loans there are no fixed periods of payment, and repayments are linked to income and ability to repay, not the size of the loan taken out.

"The Government charges a daily rate of interest equal to inflation to make sure that borrowers pay back in real terms the same amount they borrowed."

From April next year, the earnings threshold for repayment of student debt will rise from a minimum of £10,000 a year to £15,000.

But the total amount of outstanding student debt in the UK rose by 18.7 per cent to more than £14.6 billion last year.

A DFES spokesman said that, because the interest rate was equal to inflation, the size of the loan "does not build up in a burdensome way".

He added: "Whatever your circumstances, you will pay back only the same amount in real terms as the amount originally borrowed. Graduates are, of course, free to make higher repayments on a voluntary basis."

But Mr Lamb, MP for North Norfolk, said: "Here we have a situation where students are making the payment required of them, but seeing their debt increasing.

"There is a particular burden on graduates on low incomes who end up in debt for a very long time. You are starting off in life, at a point where you will be thinking about mortgages, with an enormous noose around your neck," he added.

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