Loan interest rip-off leaves students with £50,000 of debt: Changes to fees mean they are forced to pay 18 times Bank base rate

Students are leaving university with debts of almost £50,000 – as a double blow of raised fees and sky-high interest rates kicks in.

CLoan interest rip-off leaves students with £50,000 of debt paying 18 times Bank base ratehanges to fees on their student loans mean they now pay around 18 times the Bank of England base rate – adding up to £5,000 to their debt before they even graduate.

This is on top of money borrowed to cover up to £9,000 a year in tuition fees, which are set to rise again to £9,500, plus living costs. Critics described the interest charges as ‘exorbitant’ and said they are forcing a generation to start adult life ‘on the back foot’.

It has also emerged that parents are considering re-mortgaging their homes or cashing in their pension pots to help their children avoid taking out student loans.

Nathan Long, from financial firm Hargreaves Lansdown, said: ‘For many people, if they make the minimum repayments on their student loans, their debts will only get bigger and bigger. Many may never be able to pay them off at all.’

Figures compiled for the Daily Mail show that the average graduate finishing a three-year course this summer will owe £48,633. This includes £4,980 in interest accrued during their studies.

Those who take a four-year course – for example in foreign languages – will owe £66,659, including £8,455 of interest.

Since 2012 students have paid up to £9,000 a year in university fees, treble the previous cost, and this is set to rise to over £9,500 from 2018. Young people can take out student loans to cover this, plus thousands of pounds a year for living costs.

Previously, the interest they paid was just the rate of inflation. But four years ago the rules changed, meaning it is now inflation – measured by the retail price index – plus 3 per cent. This puts the total interest they gain at around 4.6 per cent, compared with the Bank of England base rate of just 0.25 per cent.

After graduating, young people will continue to accrue interest at the rate of inflation if they earn less than £21,000. Once they go over this threshold, the charge is then inflation plus up to 3 per cent, depending on their income. However, the loan continues to grow even as the graduate makes repayments, meaning it can be difficult for those on modest incomes to reduce their debt.

Even those who start on salaries of £30,000 and achieve good annual pay rises will take 28 years to pay back what they owe, figures from Hargreaves Lansdown show.

The Government has said that loans which have not been repaid after 30 years will be written off – leaving taxpayers to pick up the bill. But experts have warned that politicians could do a U-turn on this promise, lumbering graduates with debt well into old age.

Sorana Vieru, the National Union of Students’ vice president for higher education, said: ‘Forcing exorbitant interest rates onto students is yet another betrayal by the government and part of a list of political measures that shows disdain for students and their futures.’

Students are often at the mercy of the loan scheme because most of them cannot secure an alternative. As they are not working and have had no time to build a credit score, banks are unlikely to allow them to borrow the amount they need.

Sarah Lord, from financial advice firm Killik & Co, said that desperate parents have asked the firm about remortgaging their homes and cashing in their pensions to help their children avoid a loan.

She said: ‘Students are starting their careers on the financial back foot. Parents are realising that they are going to have to begin putting money away earlier to help them.’

A Department for Education spokesman said: ‘Student loans are different from commercial loans, as they are based on income, not the amount borrowed.

‘Interest is linked to RPI to ensure that student funding remains sustainable. On average, graduates enjoy a considerable wage premium. Our system is fair.’

*Source dailymail.co.uk

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