Loans for post-2012 Plan 2 borrowers are subject to an interest rate of between RPI and RPI + 3 per cent depending on earnings. So back in April when the Office for National Statistics (ONS) announced that inflation had hit 9 per cent, borrowers were facing interest rates of between 9 and 12 percent.
Now further and higher education minister Michelle Donelan has bravely ridden to the rescue:
The government has always been clear that where it can help with rising prices we will, and I will always strive for a fair deal for students, which is why we have reduced the interest rate on student loans down from an expected 12 per cent
Basically, in the legislation underpinning student loans, the interest rate is never supposed to go above the rate “prevailing on the market”, so when it does there’s a cap. The problem is that it normally takes six months for this this glorious advanced nation to apply the cap – two months for the Bank of England to calculate and notice the prevailing rate, two months because of the way DfE applies it, and two months for it to be actually applied to borrowers’ accounts by the Student Loans Company.
So where borrowers were going to have to poke up with that high rate between September 2022 and February 2023, now they won’t. Trebles all round?
Let’s dig in a bit.
In the past DfE has calculated the “Prevailing Market Rate” as the lower of the 12-month rolling averages of two data series published by the Bank of England – the “monthly average of UK resident banks’ sterling weighted average interest rate – other loans with a fixed rate to individuals and individual trusts (in percent) not seasonally adjusted” and “monthly average of UK resident banks’ sterling weighted average interest rate – other loans, new advances, on a fixed rate to individuals and individual trusts (in percent) not seasonally adjusted”.
So if you were calculating the PMR today, it should be the lower of 6.19 per cent and 7 per cent. But instead of doing it the way it has always done, this time DfE has based the PMR on predicted rates, which brings the PMR and so the cap out at 7.3 per cent. Could it be that DfE is diddling again?.
The other thing to note is that the announcement says that 7.3% will apply between 1 September 2022 and 31 August 2023. But that actually increases the expected interest rate next spring. As my colleague David Kernohan points out, if you squash a sombrero it gets wider.
I should note at this stage that DfE is playing fast and loose with when it chooses to use historical calculations versus predictions when setting rates does not go unnoticed here at Wonkhe towers. We don’t see Donelan rushing to correct historical inflation figures for anticipated rates when looking at maintenance loan rates, for example.
Nevertheless, this is a reduction from between 10.5 per cent and 12 per cent interest rates down to 9 per cent, which the government says is the largest scale reduction of student loan interest rates on record – and will mean, for example, a borrower with a student loan balance of £45,000 would reduce their accumulating interest by around £180 per month compared to 12 per cent interest rates.
It’s the framing, the politics and public understanding that troubles me.
If you wander around thinking that student loans are “normal” loans, you will be moderately pleased at the announcement. But the idea that this means what Michelle Donelan identifies as “help with rising prices” is twaddle. If you assume that almost all Plan 2 borrowers pay a graduate tax for thirty years, all the interest rate and the balance does is work out which rich and largely male graduates will be let off paying towards the end of the term.
This decision, in other words, only benefits the small percentage that would have cleared their balance – and that benefit is a long time away from being realised for most of that elite group.
If you do wander around thinking that student loans are “normal” loans, your only moderate level of “pleased” will reflect the fact that 7.3 percent still feels like a lot in the middle of a cost of living crisis. In the press release, Donelan reminds readers that from September 2023, new borrowers won’t pay any interest at all – which does beg the question, so why not scrap interest now?
She fails to mention that she’s paying for that scrappage next year (with plenty to spare) by getting borrowers from next year to pay up for 40 years rather than 30 – another change that will benefit better off rich males as the ones most likely to pay off in full within the term.
Walking straight into the trap set, NUS says that the interest rate figures are still “cruelly high”, joining forces with Donelan to bravely fight for the interests of the rich men of the future that will benefit from keeping them low.
One other note on this – as usual when DfE makes the announcement, we don’t get to see the overall economic impact of this decision, which will of course nevertheless have had the Treasury breathing all over it. That’s a significant ongoing scrutiny gap that we could do with a few backbenchers noting and tackling.