Graduates face student loan hike nightmare

15/04/2011

University graduates look like being in even more debt once they finish their studies as the government plans to increase the rate at which student loans are repaid.

Research says that students who leave university £25,000 in debt will end up being charged nearly £5,000 in interest as repayments increase at the rate of interest.

The Trades Union Congress (TUC) accused the Government of switching between different interest rates in order to maximise income.

At the moment benefits, pensions, tax thresholds and tax credits are linked to the Consumer Prices Index (CPI), which is consistently lower than Retail Prices Index (RPI).

But many state-set receipts, such student loan repayments and transport fare rises, are still linked to the higher RPI.

Last night, the TUC accused the Government of attempting to “fiddle the system” to fleece hard-working people.

According to figures, graduates with an average salary who left university with £10,000 of debt will ultimately repay £12,638. But if loans were linked to the lower CPI, repayments would total £11,725 – £913 less.

Former students with debts of £20,000 would repay £29,385 under RPI and £25,675 using CPI – a difference of £3,710.

For those with £25,000 worth of loans, the difference between RPI and CPI repayments reaches as high as £4,796.

It is claimed that sticking with RPI when tuition fees almost treble next year could cost students thousands of pounds more.

Brendan Barber, TUC general secretary said: "The Government claims that CPI is a better way to uprate benefits and pensions, but ministers' refusal to extend the CPI switch to student loans proves the change is simply a sneaky way to cut benefits, tax credits and pensions, and to get more people to pay a higher tax rate.

"Selectively sticking with RPI will add thousands of pounds to graduates' debts and lead to higher utility bills and transport fares for everyone. At the same time households across the UK will be worse off as the value of their benefits, tax credits and pensions rise more slowly.

"The Government should own up to this stealth cut and scrap CPI indexation on benefits, tax credits and pensions.”

Currently, students repay nine per cent of their earnings above £15,000.

Student loans have traditionally been linked to RPI. The maximum that most students can be charged until August 2011 is 4.4 per cent, which was the RPI rate in March 2010.

Under Government plans, tuition fees will rise from the existing level of £3,290 to a maximum of £9,000 – potentially leading to a huge rise in debts.

But to ease the debt burden, the repayment threshold will also rise from £15,000 to £21,000. Student debts are written off after 30 years.