Student loan shock: how 50,000 graduates are charged penalty rates that add millions to their loans

Sam Brodbeck
Soaring: some graduates are being charged high penalty interest rates on their loans - Getty Images Contributor

More than 50,000 graduates a year are being charged “absurdly high” penalty interest rates on their student loans because of a little-known quirk of the system.

As a result, as much as £75m in additional interest could be being added to these graduates’ loans this year, Telegraph Money can disclose.

Anyone who took out a student loan since 2012 has done so under the “plan 2” system. This operates in a far more complex way than the previous regimes. 

The interest on loans while students are studying is the rate of inflation, as measured by the retail prices index (RPI), plus 3 percentage points.

Because inflation was high last year, these students have paid 6.1pc interest since September, a far higher rate than on pre-2012 loans. 

After graduating, the interest rate is applied on a sliding scale. Graduates are charged RPI when income is below £21,000, rising up to RPI plus 3 percentage points where income is £41,000 or over.

However, the highest rate of interest – currently 6.1pc – is also applied for “non-compliance”. This is where graduates do not respond to the Student Loans Company’s requests for information. The penalty rate is applied 42 days later.

The figures expose a deeply unfair system

Once the appropriate information is received, graduates are moved off the rate but the extra interest accrued is removed only for the previous month, a spokesman for the Student Loans Company confirmed.

A Freedom of Information request submitted by Telegraph Money uncovered the fact that 50,980 people had been put on to the penalty rate in the 2016-17 financial year.

Between April and October 2017, the most recent available data, the number was 47,910 – suggesting that the full-year figures will easily pass 2016’s total.

Angela Rayner, the shadow education secretary, said the figures showed “a deeply unfair system” and reiterated the Labour Party’s calls to scrap tuition fees entirely.

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Amatey Doku, of the National Union of Students, said: “Absurdly high interest rates are only a small part of the problem but the Government’s willingness to continually add to the burden of student debt, and change the terms of repayment, is indicative of a complete disregard for the concerns of students, their families and the taxpayer, who will have to cover the cost of unpaid debt.

“It seems that the Government is bent on covering their ears and humming loudly to block out the critics as they make things worse and worse.”

Assuming those 50,000 graduates have the average debt of £50,000, the additional interest accrued could be as high as £75m a year. Of course, in reality some of those would be earning more than £41,000, triggering the highest rate of interest in any case.

In October the Government announced that new graduates would not have to start repaying loans until they earned £25,000, up from the current £21,000 threshold. In addition, maximum tuition fees will be frozen at £9,250 for the next academic year, beginning in autumn 2018.

Telegraph Money previously highlighted the ongoing issues with graduates repaying their student loans

More drastic changes may also be on the horizon after this newspaper disclosed that Justine Greening, the former education secretary, had opposed Tory plans to cut fees ahead of last year’s party conference.

Martin Lewis, founder of and a critic of the student loan system, said the penalty rate was “a psychological problem”. But he added that as most people were not expected ever to pay off their loans, the added interest was unlikely to be a practical concern for most people.

“The Student Loans Company should be high up on graduates’ list of companies to contact when they change address,” he said.

Telegraph Money has previously highlighted the ongoing issues with graduates repaying their loans. Many discovered they had paid off more than they actually owed – in some cases by up to £10,000. 

In November the Government said it would work to fix the problem by April 2019.

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