Last week, there was a huge outcry after it emerged that students are seeing their debts rise by as much as £180 a month because of the interest alone, with graduates charged 3.9% as the sum balloons. Many feel they have been duped and cheated. Students are also angry after the government backtracked on promises made in 2010 that the £21,000 earnings threshold – at which point students are required to pay back loans – would rise annually with average earnings.
Student loans were pushed centre stage when Simon Crowther posted on Facebook a letter to his local MP, Vernon Coaker, alongside the statement he received from the Student Loans Company showing the big rise in his debt. The letter immediately went viral on social media.
Meanwhile a petition started by Alex True, an engineering student at Durham University, opposing the government’s retrospective hike in the cost of loans has reached more than 120,000 signatures in just a few days. Petitions that garner 100,000 approvals can lead to a debate in parliament about the issue, although the government may be able to sidestep such a move.
“I just felt that this change wasn’t really announced in parliament and that most students were not aware of it,” True says.
He managed to put together the petition just as he was doing his finals at Durham. He says: “A retrospective change to an agreement made three years ago, when those taking out the loans were only 18, meant that my trust in the system was undermined massively. I was one of those people who deliberated a lot before going to university about the costs and the loans. It certainly wasn’t in the small print.”
True circulated the petition to friends at other universities – and within a day it was getting 5,000 signatures an hour. “Unfortunately I’m still waiting for a response from parliament. I really hope they are going to debate it.”
True also shares with Crowther deep concerns about the interest rates applied to student debt. “The idea that you are continually accumulating debt after you leave university is frightening. Unless you earn around £50,000 or more, you will never get to the stage where you actually pay off the loan. Because you have to pay the money back over 30 years, the amounts of interest you pay could be astonishing.”
Lewis, the UK’s leading consumer advocate, and creator of moneysavingexpert.com, who originally extolled the virtues of the loan system to aspiring students, is now a stinging critic. He was at one time head of the Independent Taskforce on Student Finance Information, but has been savage in his criticism of ministers, presumably because he, too, feels duped.
“This change by the government is a disgrace. It goes against all forms of natural justice. If a commercial company had made retrospective changes to what they’d promised about their loans, they’d be slapped hard by the regulator – the government shouldn’t be allowed to get away with it either.”
Praising True’s petition, Lewis said the decision risks destroying any trust future students can have in the system. “How can we ask young people to sign up to a deal for 30 years with the risk it could be changed again at a minister’s whim – without any legislation? I have already engaged lawyers, written to the PM and met Jo Johnson, minister of state for universities and science – and at every stage the government has pig-headedly refused to budge. My concern is even after a parliamentary debate they will put their fingers back in their ears.”
A Department for Business, Innovation and Skills spokesperson said: “Our student funding system is sustainable with a relatively high threshold before borrowers have to repay their loan. It removes financial barriers for anyone hoping to study, and is backed by the taxpayer with outstanding debt written off after 30 years. We consulted on freezing the repayment threshold in 2015, and this decision along with our wider reforms is helping to ensure higher education remains sustainably financed and open to all students, irrespective of background.”
The cause of the complaints
While at university, and during the year since those on three-year courses graduated, students have seen their loans charged interest of inflation plus 3%, with the government using RPI – typically higher than CPI – as the measure of inflation.
The precise rate charged is, like so much of the student loan system, complicated. While at university, interest is applied to the student loan at a rate of RPI plus 3%. This continues until the April after a student has graduated. Beyond that, graduates earning less than £21,000 a year are charged an interest rate on their loans of RPI inflation – 0.9% currently. But this goes up on a sliding scale, and by the time the graduate is earning more than £41,000, the interest accrual rate is 3.9% (RPI plus 3%). Only since April this year have repayments under the new system begun, and students have for the first time seen the amount of interest they are paying.
This regime applies to everyone who started university in England after September 2012. Older student loans have a lower interest rate. The current rate on loans taken out before September 2012 is 0.9%. When Simon Crowther began his course in 2012, RPI inflation was 3.6%, so in the first year interest of a whopping 6.6% was being added. This March, the RPI inflation rate was 1.6%, and if it continues at this rate, students can expect to pay 4.6%. Most mortgages, and many personal loans are currently offered at significantly lower rates than that.
In 2010, the government promised potential students it would increase the threshold at which point repayments start. First-time undergraduates in England, who started university in September 2012 and after, repay student loans at a rate of 9% of everything they earn above £21,000 a year after they leave. Students were told this £21,000 threshold would rise annually with average earnings.
But last October the government reversed that, freezing the threshold until at least 2021. This leaves more than two million graduates paying £306 more each year by 2020-21 if they earn over £21,000.
The government consulted on the change. Martin Lewis says 84% of responses were against freezing the threshold. Only 5% were in favour, yet it went ahead anyway.
A student earning £23,000 now repays £180 a year – had the threshold been increased to £23,000, they would have been repaying nothing.