No clear reason to use RPI to calculate student loan interest rates, MPs argue

High interest rates on student loans are "questionable", according to MPs, who have called for a major review of university funding to examine the issue.

The Commons Treasury committee said it sees no clear reason for the Government to use RPI to calculate interest rates on student loans.

In a new report it also argued that there is "little justification" for applying high interest rates to tuition fee loans while students are still studying.

Applying above-inflation rates when students are at university is seen as a "punitive measure", the cross-party group of MPs says.

How the UK inflation rate as measured by RPI has changed since 1948
(PA Graphics)

The report, which examines the current student loans system, comes as the Government is expected to announce a major review of university finance.

The review, pledged by Theresa May last autumn, is likely to look at issues such as interest rates, which currently stand at up to 6.1%.

Concerns have been raised in some quarters about interest rate levels on student loans and the impact on student debt.

In its report, the committee notes that while a student is studying, the interest rate on loans is RPI plus 3% (currently equal to 6.1%), and that from the April after they graduate until the loan is paid off, interest rates are variable depending on income, again up to RPI plus 3%.

"The Committee sees no justification for using RPI to calculate student loan interest rates," the report says.

"RPI is no longer a national statistic and has been widely discredited.

"In its Autumn Budget the Government acknowledged that the use of RPI was unfair for business rates, and the committee is unconvinced by the case put forward for its use by the then minister, in line with the committee's report on the Autumn Budget.

"The Government should abandon the use of RPI in favour of CPI to calculate student loan interest rates."

It also says: "Applying an interest rate above the level of inflation to tuition fee loans whilst the student is still at university is perceived to be a punitive measure and should be reconsidered."

The report also calls for the Government to examine how the student loans system can be simplified to ensure that it is more understandable, and to assess the case for re-introducing maintenance grants.

Treasury chair Nicky Morgan said: "The use of high interest rates on student loans is questionable.

"The Government has justified it on progressive grounds, but the Committee remains unconvinced as high-flying graduates may pay less than graduates on more modest earnings.

"No other persuasive explanation has been provided for why student loan interest rates should exceed those prevailing in the market, the Government's own cost of borrowing, and the rate of inflation.

"The Government must reconsider the use of high interest rates on student loans as part of its review."

She added: "The Government has said that maintenance loans aren't intended to fully cover a student's living costs. If a student can't access additional sources of income, they may be priced out of university.

"The Government should assess the case for re-introducing maintenance grants to help remove barriers to access for potential students."

A Department for Education spokesperson said: "Our student finance system has many strengths. We have removed upfront barriers to entry and are seeing
record numbers of 18-year-olds from disadvantaged backgrounds now going to university.

"Furthermore, graduates do not pay back anything until they are earning over £21,000 - rising to £25,000 from April.

"We will shortly be conducting a major review of post-18 education to build on the action we've already taken and ensure a joined-up system that works for everyone.

"We welcome this report from the Treasury Select Committee, which will be considered as part of the evidence base for the review."

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