Worried Clarke pegs loan interest

Eleventh-hour negotiations between education secretary Charles Clarke and chancellor Gordon Brown saved graduates from paying higher rates of interest on their student loans, it emerged this week.

Mr Clarke opposed charging more interest on loans but was still waiting for final approval from the Treasury last Tuesday, the day before the publication of the higher education white paper.

A government source said: "It was our aim to have no real rate of interest, but we had to make sure we could afford it."

Higher interest rates had been considered by the government throughout the higher education review as a way of covering the cost of any borrowing needed to cover the outlay on loans.

Charging interest on loans above the rate of inflation could have generated additional income from graduates to use for higher education. But raising interest rates would have brought student loans under the remit of the Consumer Credit Act, which sets out the interest rate rules relating to credit.

This would have given graduates the right, for example, to demand to know how much they owe, which requires the creditor to provide the information within 12 days. Inquiries from a large number of graduates could have overwhelmed the Student Loans Company, which will administer loans and repayments.

Added to this was the likelihood that the public would see interest rates as too much to bear on top of higher fees.

Nicholas Barr, professor of economics at the London School of Economics, did much to convince the government to opt for top-up fees repaid after graduation. Professor Barr also pushed for interest on loans.

But he said: "I am very pleased with the white paper. Quality comes from more resources and competition through differential fees and access from the abolition of upfront charges.

"It does so at a higher fiscal cost than would be possible in a different political environment where higher interest rates on loans would be acceptable, but let's get quality and access sorted out first."