Two former Conservative ministers have called for government action in a bid to tackle a 12% interest rate rise on student loans.
They have warned that the “outrageous” rise may discourage young people from attending university. Interest on loans taken out since 2012 is typically adjusted each September at the rate of the retail price index (RPI), a measure of inflation during the previous year, plus three extra percentage points for the highest earners. This was revealed on 13 April to be 9%.
As a result, according to the Institute for Fiscal Studies, graduates earning £27,295 or less will see their interest rates rise from the current 1.5% rate to 9%, while the maximum interest rate (paid by those earning £49,130 or more) will increase from 4.5% to 12%.
“It is a breach of what students expected – that interest on loans would be no higher than market rates… it risks frightening off new students”
Former business secretary and universities minister Greg Clark said that the high rates risked deterring graduates. He said: “A 12% interest rate on student loans is an outrageous charge that the government must prevent from happening.
“It is a breach of what students expected – that interest on loans would be no higher than market rates. And it risks frightening off new students from entering higher education, even in courses like science and engineering, at a time when the economy desperately needs these skills.
“When conditions are turbulent the government needs to be agile in taking quick action to head off unintended consequences.”
His calls were echoed by Chris Skidmore, another former universities minister. He said: “Some might argue that many students may never pay back their loans, so high interest rates are irrelevant, but the key point here is that the additional perceived debt burden created by interest on loans is putting many young people off even thinking about university, when this could be a route for transforming their lives.
“We can’t, as a country, afford for people from disadvantaged backgrounds not to fulfil their potential because of the looming shadow of debt and interest rates. When students are facing repayments of more than twice the amount they actually borrowed, regardless of whether they pay it back, we have taken a wrong turning.
“I have long called for action on this, even back as university minister in 2019. Then, rates were 6% – with students facing a doubling of this figure, the current position is unsustainable.”
It is understood that ministers are now examining how to respond to the temporary interest spike. A cap on interest payments is planned for next year, but there have been suggestions that it could be imposed immediately.
A Department for Education spokesperson said: “Monthly repayments will not increase for students if there is a change in student loan interest rates. Repayments are linked to income, not interest rates. The government will confirm the level student loan interest rates will be set at soon. For future students, the government has cut interest rates – so from 2023-24, graduates will never have to pay back more than they borrowed.”