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graduation ceremony at Portsmouth University on July 20, 2015 in Portsmouth, UK
Image: graduation ceremony at Portsmouth University on July 20, 2015 in Portsmouth, UK. Shutterstock

Interest Rates on UK Student Loans ‘Absurd’, Say British MPs

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Image: graduation ceremony at Portsmouth University on July 20, 2015 in Portsmouth, UK. Shutterstock

UK members of parliament, including former education secretary Nicky Morgan, say linking the interest rates on student loans to RPI is ‘grossly unfair’.

British MPs have hit out at the UK Government for using a “flawed” measure to work out interest rates on student loan repayments.

The Commons Treasury Select Committee, chaired by former education secretary Nicky Morgan, says the practice of linking interest rates on Student Loan repayments to the Retail Prices Index (RPI) rather than the Consumer Prices Index (CPI) is “absurd” and “grossly unfair”.

Interest rates on student loans ‘higher than those on personal loans’

RPI tends to be higher than CPI, so graduates end up paying more. With RPI at 3.3%, from the new academic year, interest rates will rise to 6.3%. March’s CPI rate was 2.3%. While British students do not have to begin repaying their loans until they have graduated and are earning more than £25,000 a year, 6.3% is higher than the interest rates charged on numerous unsecured personal loans now offered by high street lenders.

“Continuing to use a measure that it readily admits is flawed, on the grounds of consistency, is absurd,” says Morgan. “It guarantees that student loan interest rates will be consistently flawed.”

‘RPI has always been used’, says UK Government

However, the UK Government says that using RPI provides “consistency”. “RPI has always been used for calculating interest on student loans, providing consistency over time,” said the Department of Education.

“The flaws in the RPI measure of inflation are well understood, and the Office of National Statistics has delivered a substantial programme of work to improve the way they measure inflation over the last two years.

“The review of post-18 education and funding will look at how students and graduates contribute to the cost of their studies… It is now for the independent panel to consider the issues raised within the terms of reference in their report to Government.

“The Government cannot prejudge the findings of the panel or outcome of the review.”

Charging interest rates while students study is ‘punitive’, say MPs

However, the Commons Treasury Select Committee’s report found that interest rates on student loans were too high and that there was “no persuasive explanation” for why they should exceed market rates on personal loans, inflation or the Government’s own cost of borrowing.

MPs also described the Government’s application of interest rates on loans while students were still studying as “punitive measures” that should be reconsidered.

Note: The opinions expressed in this article are the author's own and do not necessarily reflect the view of Alvexo on the matter.