Fear of 12% interest on student loans will put many off university, top Tories warn

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Senior Tories are sounding the alarm over the “outrageous” interest rates to be applied to student loans later this year, after warnings that some graduates will soon be hit with rates of up to 12%.

In the latest sign of party unease over the effects of high inflation, former ministers and MPs are calling for the government to step in and prevent the increases. They say some young people who have the ability to take up a university place will be put off by the idea of repaying a large, expensive debt for years.

It is understood that ministers are now examining the issue of the temporary interest spike, which could see some higher-earning graduates facing thousands of pounds in extra debt. Two former Tory ministers who used to oversee university policy told the Observer that they believed action was needed. One, former business secretary and universities minister Greg Clark, said the high rates risked deterring graduates from getting the skills that were badly needed.

“A 12% interest rate on student loans is an outrageous charge that the government must prevent from happening,” he said. “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.”

Under present plans, English and Welsh graduates who took out a student loan after 2012, and earn more than ?49,130 a year, face the 12% maximum income rate. That is because the rate is linked to the current RPI inflation rate. Their current interest rate is 4.5%. The interest rates for low earners will rise from 1.5% to 9%.

This means that for a typical debt of about ?50,000, a high-earning recent graduate would incur about ?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 that the spike should be temporary, but many people now want a cap imposed immediately.

Chris Skidmore, a former universities minister under Boris Johnson, 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.”

Emma Rhymer, 29, an early-years practitioner at a day nursery in London, said she was earning just over the threshold of ?27,295 at which graduates must pay back their student loan. While she has been making repayments for about two years, the interest rate already meant she was “not even chipping away at it”.

She now owes nearly ?50,000. “The repayments come out of my pay cheque every month” she said, “and still the amount of my debt increases. Although I apply my degree in early childhood studies every day to my work, I find myself questioning whether it was worth it. It feels like the repayments are going to come out of my wages every month for ever.

“I’m very lucky to be doing a job I love, a job I trained and qualified for. But it’s like I’m being punished for going to university. I’m worried I will never be able to afford to buy a house and have the financial security I will need to start a family. It’s affecting my ability to have a future.”

The threat of 12% interest rates has led to accusations that some are being persuaded to remortgage, or to extend their mortgage, to service their student debt. Mortgage broker Tembo recently removed an online advert encouraging people to remortgage to repay student loans after the MoneySavingExpert.com website suggested that the advice could have left 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, 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.”