Student loans cost increase

The Student Loans Company have just announced that they are to increase the real cost of post 1998 student loans.

Student loans are supposed to be linked to the lower of the retail prices index (RPI, a measure of inflation) and the Bank of England base interest rate +1%. The idea being that inflation does not erode the cost of the loan and so you pay back in real terms exactly what you borrowed. Thus the only cost to the government for the loan facility which encourages thousands of young people into higher education, is that of administration and of opportunity cost, and over the life term of the loan there is effectively no cost to students.

Unexpectedly, since this system came into place we’ve had a bit of a recession and now the RPI is at -0.4%. The government has decided to lower the student loan interest rate to 0%, which is 0.4% higher than the cost of living, meaning that students are now paying more for their loan than they have borrowed. This isn’t lots of money, about £40-£50 per year but government forecasts expect RPI to hit -3% by the end of the year, which is more like £300-£400 extra per year. This breaks the understanding that I think many of us had when taking out the loans.

If you feel strongly about this then please sign the petition or better yet, write to your MP. You can use my letter to Paul Holmes as an idea of what to write but please do not copy it word for word - MPs get that many copy and pasted identical letters that they don’t tend to pay them much attention.

Dear Paul Holmes, I'm writing to you about the recent decision to lower the interest rate of post 1998 student loans to 0% between 1st September 2009 and 31st August 2010. As you may know, student loans are linked to the lower of the Retail Price Index (RPI) and Bank of England base rate plus one percent. The aim of this arrangement was to keep student loans in-line with the cost of living so that students will payback the same as they loaned in real terms. With recent figures showing that RPI is -0.4% and the government setting student loans at 0% interest, students are now paying back more than they loaned in real terms. It is only a small amount but the forecast in the last Budget was for RPI to fall to -3%, which would then cost students and graduates hundreds of pounds each year. Given your record of voting against top-up fees I hope that you will do what you can to oppose this. Yours sincerely, Dean Sas