Senior Tories are sounding the alarm over ‘outrageous’ student loan interest rates later this year, after warning that some graduates will soon be hit with rates as high as 12%.
In the latest sign of party unease over the effects of high inflation, former ministers and MPs are calling on the government to step in and stop the increases. They say that some young people who have the capacity to hold a place at university will be put off by the idea of paying off a large and expensive debt for years.
It is understood ministers are currently considering the issue of the temporary spike in interest, which could see some top-earning graduates face thousands of pounds in additional debt. Two former Tory ministers who oversaw university policy told the Observer that they believed action had to be taken. One, former business secretary and minister for universities, Greg Clark, said the high rates risked deterring graduates from getting badly needed skills.
“A 12% interest rate on student loans is an outrageous charge that the government must prevent,” he said. “It’s a violation of what students expected – that interest on loans should not be higher than market rates. And it risks scaring off new students from entering higher education, even in fields like science and engineering, at a time when the economy desperately needs these skills. When conditions are turbulent, government must be nimble by taking quick action to avoid unintended consequences.
Under current plans, English and Welsh graduates who took out student loans after 2012 and earn more than £49,130 a year face the maximum income rate of 12%. This is because the rate is tied to the current RPI inflation rate. Their current interest rate is 4.5%. Interest rates for low earners will rise from 1.5% to 9%.
This means that for a typical debt of around £50,000, a recent high-income graduate would incur around £3,000 in interest over six months. The added interest does not affect the level of monthly repayments. A planned cap on interest payments next year means the spike should be temporary, but many people now want a cap imposed immediately.
Chris Skidmore, former universities minister under Boris Johnson, said: ‘Some might argue that many students may never repay their loans so high interest rates are irrelevant, but the key point here is that the perceived additional debt burden created by loan interest is discouraging many young people from even thinking about college, when it could be a path to transforming their lives.
“As a country, we cannot afford for people from disadvantaged backgrounds to fall short of their potential under the looming shadow of debt and interest rates. When students face repayments of more than double the amount they actually borrowed, whether they repay or not, we’ve taken a wrong turn. I have long called for action on this, even as university minister in 2019. Rates were 6% then – with students facing a doubling of that figure, the current stance is unsustainable .
Emma Rhymer, 29, an early years practitioner at a nursery in London, said she was earning just over the £27,295 threshold at which graduates must repay their student loans. While she had been paying it back for about two years, the interest rate already meant she was “not even eating it”.
She now owes almost £50,000. “Refunds come out of my paycheck every month,” she said, “and my debt always goes up. Although I apply my degree in early childhood studies to my job every day, I wonder if it was worth it.I feel like the refunds are going to come out of my salary every month forever.
“I’m very lucky to be doing a job that I love, a job that I’ve been trained and qualified to do. But it’s like I was being punished for going to college. I fear I will never be able to afford to buy a house and have the financial security I will need to start a family. It affects my ability to have a future.
The 12% interest rate threat has led to accusations that some are being persuaded to remortgage or extend their mortgage to pay off student debt. Mortgage broker Tembo recently removed an online ad encouraging people to remortgage to pay off student loans after website MoneySavingExpert.com suggested the advice could have made people worse off.
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 and not to interest rates. The government will soon confirm the level of interest rates on student loans. For prospective students, the government has cut interest rates – so from 2023-24 graduates will never have to repay more than they borrowed.