26 November 2007
We received a petition asking:
"We the undersigned petition the Prime Minister to Charge Student Loan interest at the CPI rate and not RPI."
Details of Petition:
"Students pay interest on their student loans at the rate of inflation. Currently this is equal to RPI (Retail Prices Index). The Chancellor has moved his own measure of inflation to CPI (Consumer Prices Index). This is because CPI is a more accurate measure of inflation. The Chancellor himself said in a report to the Bank of England "the CPI is a more comparable measure of inflation". So why does the Chancellor charge students RPI on their student loans? Simple-RPI is a higher rate of interest: In February RPI was 4.6% and CPI was 2.8%. That means students are being charged interest 1.8 points higher than inflation. When compounded over the life of the loan this is a lot of money! Also, CPI measures increasing costs of university accommodation and fees whereas RPI does not. The argument that pensions and benefits go up in line with RPI is invalid since few students will be on state benefits and by the time they draw a State Pension, the loan will have been paid off or written off!"
Read the Government’s response
The principle behind student loans is that borrowers should repay broadly the same amount, in real terms, as they borrowed. To achieve this, we peg the interest rate on student loans to the rate of inflation. Student loans are subsidised by the taxpayer, and this interest rate is generally significantly lower than for commercial loans.
The measure of inflation used is RPI (Retail Price Index), and this has been the same since student loans were first made in 1990.
The interest rate is adjusted annually - the RPI figure for the year to March is used as the interest rate for the following academic year. So, for the academic year 2007/08, the interest rate will be set at the RPI rate for the year to March 2007 - 4.8%. The figure has been calculated by the same methodology we always use.
Viewed over a period of several years, the student loan interest rate will be equivalent to the rate of inflation; but with a time lag. To ensure that this remains the case we need to use the same measure of inflation consistently over time.
There is no single measure of inflation that is appropriate for all purposes. RPI is an index that is still widely used as the basis for uprating all sorts of entitlements, such as state benefits. This is stated simply to illustrate that RPI is a valid and widely used measure, not to say that it has any particular bearing on students or graduates income or expenditure.
The Consumer Prices Index (CPI), which excludes mortgage repayments, is currently lower then RPI, but this will not necessarily always be the case. We believe it is right to use the same measure of inflation consistently across the years, and not to make changes simply because one measure is lower (or higher) at a particular point in time.
What is most important for graduates managing their finances is consistency and certainty about the rate they will be charged and the volatility of UK inflation since 1997 has been around one sixth of that in the previous two decades. The interest rate on student loans has averaged out at below 3% per annum.
For the vast majority of borrowers - those who took the new income contingent student loans available since 1998 - the revised interest rate does not affect the level of the borrower’s monthly repayments. These are set solely in relation to their earnings - at 9% of all earnings above £15,000.