Student loan interest cuts won’t help most graduates – unless this changes too ...Middle East

I applaud the Conservatives for admitting their party got it wrong on student loans – and at least trying to propose a solution to fix things.

Along with trebling tuition fees, the Tory-Lib Dem coalition redesigned the student loan repayment system in 2012, introducing Plan 2 loans on which many graduates accrue interest at a rate well above inflation.

Their current leader, Kemi Badenoch and shadow Chancellor Mel Stride have conceded this is unfair and said they would change things if they were to win the next election, cutting the interest rate.

Labour is also now looking at changing the interest rate, as reported by The i Paper.

Though any policy change will aim to help graduates, a reduction in the rate alone is sadly too little too late without an additional tweak. I implore the opposition and the current government to consider.

There are several unfairnesses with the student loan system, a major one being that the salary threshold at which the loans are repaid is being frozen from next year until 2030.

This means graduates pay more and more towards their loans as their wages rise to keep up with inflation.

Another is the punitive interest rate, where many see their borrowing increase despite making repayments.

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Badenoch is right to focus on the interest rate as the threshold freeze will end soon after the next election anyway.

Any promise to reverse the freeze would be too easy a promise for Badenoch to make – given she’d never have to actually do it.

She should be lauded for avoiding the straightforward option and calling for Labour to make that change.

Yet her focus on bringing the interest rate back in line with inflation alone won’t fix the mess that her predecessors have left millions of graduates in.

To actually make a meaningful difference to most borrowers, she needs to go further.

The interest rate on student loans varies between the Retail Prices Index (RPI) measure of inflation and RPI plus an additional 3 per cent, depending on earnings.

The earliest Plan 2 borrowers took out their student loans in 2012, and by the earliest point Badenoch would have time to change the interest rate – after the next election in 2029 – many borrowers will have been accruing interest on their loans at a rate well above inflation for close to 17 years.

As a result, hundreds of thousands of graduates have loans over £100,000, and millions more owe sums approaching this.

Even if the rates of interest are changed going forward, there is simply no chance they will be able to repay them in full before they are wiped, 30 years after they graduate.

For example, if someone who went to university in 2012 and did a four-year course owes £100,000, then even if the interest rate was reduced to zero in 2029, they would need to make repayments averaging £5,550 a year to clear their loan before it is wiped in 2047.

This is because they would have made 12 years of repayments – starting the April after you graduate – and will have 18 years left.

It would require an average salary of more than £90,000 in today’s money – a top 5 per cent earner.

With an interest rate equivalent to inflation, they could need to earn even more – over £100,000.

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The reality is that for many graduates, reducing the inflation rate going forward, while a nice gesture, will not help.

What Badenoch or the current government needs to do instead is introduce a rule that graduates can only repay a certain multiple of what they initially borrowed.

If they capped this at, say, 1.2 or 1.3 times the initial loan, they could help those who have seen what they owe grow at ridiculous rates while the interest rates were at these unfair levels over the past decade and a half.

Without that, what any policy change essentially signals is this – we messed up for your generation, and it’s too late to save you.

Gesture politics won’t cut it for a generation that feels wronged, and if parties want to try and win these voters over, they need to address their problems properly.

It is good to see student loans finally on the political agenda – but let’s make sure we don’t end up with the wrong answer to the right question.

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