Student loans carry an interest rate of RPI plus 3 per cent. I recently asked two elite students what they thought RPI was. One got A*AA at A-level and is studying English literature at Edinburgh, the other is about to start medicine.
Neither had a clue. It is, of course, the Retail Price Index, a measure of inflation that is currently running at 3.2 per cent annually. This means that students have an astounding interest rate of 6.2 per cent on their loans, nine times the 0.75 per cent base rate.
Here were top students, going to top universities, who had no idea how much interest they were going to pay. Nor did they know how their interest rate might increase if inflation goes up, nor what compound interest they were liable for.
And what about less able students? What about students whose parents also have no idea about the RPI? In 2010, 51 per cent of university applicants had three grade Ds at A-level or worse. What about them?
Students are taking on debts that they have no idea about. Imagine if banks sold a £60,000 loan – a typical student debt – at an interest rate that the borrower could not understand. It would be called predatory lending to unsuspecting, naïve borrowers.
Many students who sign up to loans seem to think it is ‘free’ money given out by the government and it is their ‘right’ to have it. Only later, when they see the interest piling up on their statements, do they realise it is not ‘free’ at all.
Just think how many £100-a-month payments it takes to pay off that £60,000 – and that is without the accumulated compound interest. It’s as big as most people’s 30-year mortgages used to be only a few years ago.
Indeed with the median earnings in Britain at around £22,000, (significantly lower than average incomes), you might actually only just be eligible for a mortgage of that amount at three times income. You are effectively taking on a first mortgage but with no asset to back it. The piece of paper confirming that you have a BA in surfing studies might just be that, a flimsy piece of paper with no value.
Of course, there is one way to get that ‘free’ cash. And that is never to get a decent job and never to earn over £21,000, the threshold at which you start paying back your loan. That will make you one of the estimated 75 per cent of students who will never pay off their debt.
Money Saving Expert explains: ‘You stop repaying the earlier of when you die, when you’ve cleared the initial borrowing plus interest, or 30 years from the April after you graduated. Even if you’ve not paid a penny back, for those who started in or after 2012, the loan is wiped after 30 years.’
So the debt is a disaster for the student if he or she wants to get on and succeed in a job, or it is a disaster for the taxpayer who has financed the loan.
Talk about a disincentive to work. Party as much as possible, rack up as much debt as you can. Then work as little as possible, and it will all be wiped clean. Once again, the government has designed a system where the lazy win and those who want to get on pay.
If inflation hits, those three letters RPI that none of the students understand might suddenly become very important. Unfortunately, once again, it will only affect the ones who want to work.