There is perhaps no more important time to educate people about their finances than when they begin to take responsibility for it.
Sadly, the last two decades have seen Britain make a colossal hash of it, as students have been forced into an increasingly crazed financial system.
The latest chapter in this sad story involves the interest rate on student loans set to rise to 12%.
Yes, you read that right, students and some graduates are in line to pay early 1990s interest on the tens of thousands of pounds of debt the current system encourages them to rack up.
Flying high: Inflation is at its highest level in 30 years and the RPI, at 9%, on which student loan interest rates are based, is even higher than the CPI at 7%.
Indeed, the student loan system bases interest on retail price index inflation – a measure considered dubious enough not to be an official national statistic – and then for the highest earning graduates and, again, more bizarrely, those currently in college, it adds 3 percent.
It’s the extra sting in the tail of a student loan system, where the official and usually lower CPI inflation rate has been ignored in favor of the outdated RPI measure.
Rates are revised every September and the month that counts for the reading of the RPI is March. When that figure came in yesterday, it was 9%.
This means that low-income graduates from the post-2012 system will pay 9% – a rate consistent with the RPI – and high-income and current students will pay 12%.
For comparison, the Bank of England’s base rate is 0.75%, the government’s 30-year cost of borrowing is 1.95% and the average five-year fixed rate mortgage is by 3%.
Of course, student loans are not directly comparable to any of these loan criteria, but they are effectively guaranteed by the individual themselves for at least 30 years.
After those three decades, any uncleared debt is wiped off, serving as justification for the system that was introduced with the £9,000 a year tuition fee in 2012.
“Don’t worry about the debt,” they told the students. “The monthly payments aren’t too high and many of you will never end up repaying them in full.”
Why successive governments thought this was a wise message to introduce young adults to the world of managing their finances is always beyond me.
I’m pretty sure most 18 year olds who take on tens of thousands of pounds of lifetime debt don’t really understand what they’re getting into, how they’re going to pay it back and how the interest rate works on loans.
I also think it’s not too much of a stretch to imagine that if a bank were to offer widespread financing on a similarly confusing basis to financially naive customers, they might find themselves drawn over the coals by the hound of guard.
Up in the air: Today’s students and new grads have already received a raw offer on fees and loans compared to those before them, will they now get a 12% rate
Students, however, have little choice but to accept the status quo.
Some may have parents who are wealthy enough to pay their way; although you need very deep pockets to do so – and even deeper to then play Bank of Mum and Dad for a house deposit later too.
For most though, it’s a tough decision, accept the student loan system with all its flaws or not go to college.
As a nation though, we don’t have to accept that and I think it’s high time we started to come clean with the students.
A good starting point would be for the government to act quickly and confirm that the interest rate on student loans will not reach 12% or even 9%.
Students and graduates are among those who have suffered the highest costs in terms of education, career, income and wealth from the Covid pandemic lockdowns. They did it to protect others, while having a very low risk of getting sick.
They should be protected against the pandemic inflation spike and have their interest rate capped – perhaps at 5%, which would already be a reasonably high rate.
The IFS explained yesterday that there is a condition in the loans which allows this.
He said: “There is a little-known piece of legislation that was aimed precisely at avoiding this situation. By law, interest on student loans is not allowed to exceed “prevailing market” interest rates.
Those of us with long memories remember students getting screwed over loan rates on the other end
This is considered the average interest rate on unsecured commercial loans and the latest effective market rate for February 2022 is 6%.
And even without that clause, we know the government can step in and bend the rules whenever it sees fit: pensioners who have been denied their triple lockdown this year can attest to that.
Meanwhile, those of us with long memories may recall that students got screwed over loan rates on the other end.
In 2009, when deflation rather than inflation was the big threat, the March RPI was -0.4%. At the time, interest rates on student loans after 1998 were simply RPI and so the big question was whether graduates would see negative interest.
This would have seen their loan balances reduced slightly and monthly payments would have cleared the debt faster.
Have negative rates consistent with the RPI occurred? Of course, they didn’t.
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