UK lawmakers tell government to cut interest rate on student loans

By David Milliken

LONDON (Reuters) – The British government should cut the interest rate it charges on loans to English students, and statisticians should review why the cost of hefty write-offs barely figures in official borrowing data, a parliamentary committee said on Sunday.

University tuition fees in England are high compared with elsewhere in Europe at around 9,000 pounds ($12,640) a year, and the opposition Labour Party gained support from students in May 2017’s election with a pledge to try to reduce their debts.

Student loans taken out since 2012 charge a variable interest rate that is 3 percentage points higher than the prevailing rate of retail price inflation, taking the current interest rate to 6.1 percent.

The British parliament’s Treasury Committee said in a report to the government ahead of a review of university financing that the use of RPI as a benchmark was unfair, and the 3 percentage point premium introduced in 2012, was hard to justify.

“The government must reconsider the use of high interest rates on student loans,” Nicky Morgan, the Conservative chair of the cross-party committee, said.

The committee was particularly critical of the use of RPI as a benchmark for the loans, which statisticians say overstates increases in the cost of living.

BoE Governor Mark Carney told the committee earlier in the month that the government should phase out contracts tied to RPI, which is also used to calculate interest payments on index-linked government bonds.

SHIFTING RISK

The committee also criticized the student loan system for disguising the true amount of public spending on universities.

Unlike normal loans, student loans need not be repaid until the borrower earns more than 21,000 pounds a year – rising to 25,000 pounds in April, just under the average full-time wage. After 30 years, any balance is written off.

The government told the committee that 45 percent of the total amount borrowed, including interest, was likely to be written off – up from an estimate of 35 percent before the increase in the repayment threshold last year.

Recently, the government has begun to sell loans on to the investors at an apparent loss, offloading debt with a face value of 3.5 billion pounds for 1.7 billion pounds in December.

The committee said this did not provide clear value for money.

“The government may be better off keeping student loans on its own balance sheet, rather than shifting the risks to the private sector and paying a large premium for doing so.”

However, selling the loans does lower the headline measure of public-sector net debt targeted by finance minister Philip Hammond, while at the same time stopping future write-offs from showing up in the main measure of public-sector net borrowing.

“Selling off student loans prior to their write-off allows the government to spend billions of pounds of public money without any negative impact on its deficit target at all, creating a huge incentive for the government to finance higher education through loans,” the committee said.

Given this, Britain’s Office for National Statistics should look at whether some of the lending should instead be treated as spending that would show up in government borrowing data, the committee said.

Source: Investing.com