The Government has announced that it will cap student loan interest rates at 6 per cent from September, in a move that skills minister Jacqui Smith says will “provide immediate protection for borrowers”.
The move comes ahead of fears that inflation could spike later this year as a result of the rise in oil prices caused by conflict in the Middle East.
Most graduates will shrug their shoulders at this change – because it will mean little to them in practical terms.
The interest rate on Plan 2 loans – taken out by most university go-ers who started their studies between 2012 and 2022 – is charged at the retail prices index (RPI) rate of inflation, plus an additional rate of up to 3 per cent, depending on earnings.
Rates are currently between 3.2 per cent for low earners and 6.2 per cent for higher earners, so graduates will only really notice – at best – a marginal slowing in the speed at which interest is accrued.
Lower earners won’t notice anything at all – the cap will make no difference to them.
But this is almost by the by. The honest reality is that student loans have been charged such pernicious rates of interest for so many years now, that tens of thousands of graduates have no chance of paying them off at all before they’re wiped, 30 years after they left their courses.
Even at a rate of 6 per cent, those with typical loans of around £50,000 to £60,000 will still accrue £3,000 or more of interest.
They repay 9 per cent of what they earn over £29,385. In other words, unless they’re earning significantly more than £62,000 – roughly the amount needed to repay £3,000 a year – they will still see the amount they owe grow, even with the new cap.
It seems unlikely that the Government is naïve enough to believe that this move will do anything to stop the anger from graduates.
That anger will only rise over the next three years. In that period, Labour plans to freeze the threshold at which the loans are repaid, so borrowers will repay more money as their salaries rise.
Far from giving them protection, the Government is making their situation worse.
Last month, Rachel Reeves said to graduates that student loans were not at the “front of the queue” in terms of her political priorities.
This move will do little more than confirm that.
It is a tokenistic change that barely alters the landscape for graduates at all. In fact it does so little, that it’s almost an insult.
Expect the student loan debate to rumble on, and campaigners to continue calling for improvements to interest rates and other repayment terms.
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