Tory sums 'don't tally'

August 6, 2004

Leaked Conservative Party proposals to raise interest rates on student loans would raise only half as much as top-up fees, a leading economist claimed this week.

The Conservatives have already confirmed that they would abolish tuition fees and halt the expansion of student numbers.

But after failing to announce their funding plans before last month's parliamentary recess as promised, speculation mounted this week that they are due to set out proposals in the autumn to charge interest of about 2 per cent on student loans to raise much-needed cash for universities.

The Tories would not comment on the speculation, and the Institute of Fiscal Studies denied reports that it had "validated" the 2 per cent figure. But it confirmed that it had been consulted over draft figures.

"We have not seen their final proposals and we have not validated their figures," said a spokeswoman, who would not comment further.

Nick Barr, professor of public economics at the London School of Economics, is a staunch advocate of charging interest rates on loans - but only as part of a funding package that includes charging top-up fees.

"As I understand the Conservative plans, they intend to charge interest rates in line with the cost of borrowing," he said. "This is something I have advocated since 1988 and is a sensible step forward, but it still leaves a very, very big gap."

According to Professor Barr, charging interest rates in line with the rate at which the Government borrows money would save about £800 million a year.

This is how much it costs the Government to subsidise the current zero rate of interest charged on the £2.5 billion loaned to students every year by the Student Loans Company.

But Professor Barr said that the Conservatives would have to spend a lot of the £800 million saved - about a third - on targeting interest rate subsidies for students on lower incomes, leading to a net saving of closer to £500 million.

"The current flat-rate tuition fee raises around £400 million a year," Professor Barr said. "And the Government says that top-up fees will raise £1 billion a year. So the Conservatives could still be left with a big hole if they abolish these fees."

Students in New Zealand, where interest is charged on loans, pay 7 per cent interest, based on a 4.2 per cent base rate and a 2.8 per cent interest adjustment rate.

Education Minister Stephen Twigg said: "Under the Tory plan the interest charged to students on their loans will just keep growing and growing, like that on a credit card."

Liberal Democrat education spokesman Phil Willis said: "Tory policies will see poorer students being priced out of universities by huge hikes in the cost of student loans."

Shadow higher education minister Chris Grayling said he would not comment on "speculation" and said the party would reveal its package of measures soon.

At present, students can borrow up to £3,695 a year, and repay loans when they earn £10,000 a year, at a rate of 9p for every pound earned above £10,000. Under forthcoming top-up fees, students will access higher loans, but repayments will not start until earnings reach £15,000.

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