The rising cost of Student Loans in COVID-19 times
In March 2020, the Department for Education announced that effective from 1 September 2020 Student Loan interest on Plan 2 loans (i.e. those issued after 2012) would rise to 5.6%- consisting of March’s Retail Price Inflation (RPI) figure of 2.6% with a whopping 3% margin added on top. This new rate was an increase from the 5.4% applicable the previous year.
The Student Loan interest rate rise came at a time when the Bank of England base rate was just 0.1% (and mortgages available for as little as 1%), and the government was working overtime with the banks and regulators to offer assistance to consumers affected by the COVID-19 pandemic.
So what about the students? Are they not entitled to the same treatment? A student with an outstanding loan of £45,000 will have around £2,520 added to their debt this year while many other consumers benefit from the largesse of repayment holidays, freezing of interest and debt write-offs. There is also a suggestion that the true cost of the Student Loans may be significantly more than 5.6% as unpaid fees and charges are added to the loan each month – this is known as compounding interest.
While it is true that graduates who earn £26,575 currently do not need to make payments on the student loans (and this threshold will increase to £27,295 effective from April 2021) interest will still be applied on debt at the rate of RPI. Those whose annual wages are in excess of the threshold will nonetheless observe the interest rate on their debt increase to the RPI of 2.6% plus a margin of up to 3%.
What is more disquieting is that the minute you sign up to your first Student Loan and head off to the bar to celebrate interest will be applied from that date until the April following your graduation at the rate of RPI plus 3%. There is a compelling argument that interest should either be removed entirely, or at least capped at a much lower rate, which should only kick in when students have left university.
Good luck finding your loan agreement. Loan declarations will often contain a provision that students agree to all terms and conditions “available online” without a hard copy of the agreement provided or a link to the relevant terms.
Why are loan agreements not given to students so they know what they are signing?
The above creates the impression that Student Loans are simply unfair in a number of ways: especially as they contain unclear terms and are expensive.
Laws exist to prevent unfair relationships between debtors and creditors based on the terms of the agreement which may include terms relating to price or excessive interest. Laws also exist to protect individuals from uncertain agreements; and agreements that are one-sided and create an imbalance of power between the parties.
Student Loans may be the area of challenge which invokes such laws.
