Question to the Department for Education:

To ask the Secretary of State for Education, for what reasons interest rates on student loans are set at their present level; and what the potential merits are of lowering those levels.

The interest rates for income contingent student loans are prescribed by secondary legislation. The rates for all three schemes are set annually and apply from 1 September to 31 August the following year. The rates are based on the retail price index (RPI) from the previous March.

Interest rates for student loans in repayment vary with the income of the borrower. Borrowers earning less than £21,000 p.a. are charged interest at RPI only. Interest then increases on a sliding scale with income up to a maximum of RPI+3% for borrowers earning over £41,000.

Government-issued student loans have much more favourable terms than commercial loans, and are subsidised by the Government. Borrowers are protected. Monthly repayments are linked to income and not to the amount borrowed. Borrowers earning less than the repayment threshold of £21,000 repay nothing at all. Borrowers earning above £21,000 repay 9% of their income above the threshold, irrespective of the amount borrowed. Any outstanding loan balance, including interest, is written off after 30 years with no detriment to the borrower. Student loans are available to all eligible students regardless of their previous financial history. The Department is not aware of any commercial loans that offer this level of borrower protection.

This system of variable interest rates based on income is progressive, and ensures that higher earners make a fair contribution to the sustainability of the higher education system. Reducing interest rates would only benefit higher earning borrowers, who would pay back less than they do currently. Low-earning borrowers, who will have a proportion of their debt written off at the end of the loan period, would not benefit from a reduction in rates.