Exactly one week before Theresa May called the election, on April 11th, the Student Loan Company raised the interest rate on student loans to 6.1%, according to its formula of inflation plus 3%.
Six weeks later, following an unexpected revolt by young people, the Conservatives performed disastrously in the election. Jeremy Corbyn’s Labour party had promised to abolish tuition fees.
Are these phenomena by chance related?
Not according to the Conservative Party itself, which is in denial on this subject. In the last year or so I have mentioned the loan shark rates on student loans with Tory high-ups and received totally bizarre responses, including: “Don’t worry, most people won’t have to repay it,” or “graduates earn more than non-graduates so who cares?” or “the average repayment will only be a pint of beer and two packets of crisps, it is a non-issue.”
Well, think about it for a moment. You can get a mortgage charging less than 2% and the Government itself borrows at 1.5%, but it is charging students 6.1% – a rate at which the debt will double every 11 years. How can that be right?
The student loan system is such a dog’s breakfast, with so many holidays available for those who don’t pay, so many students who have gone AWOL, so many delinquencies and defaults (none of these statistics are public, by the way) that it has to charge those who do become higher earners a very high interest rate to try and make up the shortfall.
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To remind you, the system is that students borrow the money to pay both tuition and maintenance (grants have been entirely abolished), interest starts accumulating, and then they start making repayments when their earnings hit £21,000 (a level which is not index linked).
The result is we are forcibly creating a generation of good hard working people who not only graduate with large debts (on average £40,000 and rising). They will have negative net worth for many years and struggle not only to put together a deposit for a house, but the income they have available to get a mortgage is much diminished.
Does this matter? Yes, yes, and yes. Politically, as James Forsyth of the Spectator has correctly argued, how can the party of capitalism sell capitalism to people without any capital? Morally, it is surely wrong to charge such a high interest rate in a low interest rate environment. And economically, student debt is rising at £13bn a year and has just hit £100bn. It will have its own chapter in the next financial crisis when the Government inevitably has to bail out the system.
What is to be done? The Government should immediately rebase the interest-rate formula to link it to its own, much lower, borrowing rate and then announce a review of the system. Among other things, student loan repayments should obviously be tax deductible. I fear, however, that the government doing nothing is currently more likely.