By Lauren Thompson
The £6,000 interest charge hidden in new student loans that will be handed to graduates the day they leave university
Exorbitant interest rates on new university loans mean that average middle-class students will owe £6,000 more on the day they graduate than they originally borrowed to fund their three-year course.
From the moment they receive the first tranche of their loan, they will begin racking up interest at a crippling rate which is 3 percentage points above inflation and higher than at most high street banks.
A Daily Mail investigation found that typical students will have to borrow £43,500 to fund their higher education over a three-year course – £9,000 a year for tuition and £5,500 a year for living costs.
Before they even start work, that debt would have grown to £49,404.
And interest charges would rack up year after year, with many saddled with a massive debt they can never hope to pay off, even if they have a relatively well-paid job.
A Money Mail investigation into this student debt-trap has also revealed:
The Government may pocket more than £150million in interest in the first year of payback;Low-earning graduates will have to pay 41p in every pound they earn in loan repayments and tax;
Higher earners could be forced to pay back double what they borrowed;
Graduates who don’t get a full-time job for several years will be £25,000 better off
Ian Mulheirn, of the Social Market Foundation think-tank, said: ‘The headline figure of £9,000 a year for tuition fees is deeply misleading. With punishing interest rates this high, and kicking in so early, it is more like they’ve increased from £3,000 to £12,000.’
From September 2012 tuition fees will rise from £3,290 to £9,000 a year at most universities. All students will qualify for a loan or a grant to cover these fees and their living expenses. How much they get depends on their household income.
While they are at university the interest rate is inflation, as measured by the retail prices index (RPI), plus 3 percentage points. It remains at this rate until they graduate.
Currently RPI is 5.2 per cent, so the loan interest rate would be 8.2 per cent – 1.5 per cent higher than on a personal loan from Marks & Spencer Money.
After they leave university the interest rate on the loan will depend on earnings.
Repayment does not begin until their salary tops £21,000. However, even below this salary interest continues to rack up at the rate of RPI.
On earnings between £21,000 and £41,000, the interest rate gradually rises to 3 percentage points above RPI. If the loan is not repaid within 30 years, any remaining debt is written off.
For our calculations, which have been compiled by financial data analysts Moneyfacts, we have assumed inflation is 3.5 per cent and that the graduates leave university with a debt of £43,500.
One graduate starts work on £21,000 and receives a 5 per cent pay rise every year. Over 30 years they would pay back £68,869 – of which £25,369 is interest.
At the age of 50, they would still be paying £5,889 a year in student loan repayments. When the loan was finally written off the graduate would still owe £123,285.
Our second example assumes the same salary but the graduate goes travelling for five years and starts earning £21,000 only on returning to Britain.
They would pay back £42,954 over 30 years, £25,915 less than someone who starts earning £21,000 immediately after graduating. A massive £189,027 would be written off.
Our third is a high-flier who starts on £30,000 and earns £100,000 by the age of 50. This graduate would pay back £89,100 – which means the £45,600 interest they would have paid is greater than the sum they originally borrowed.
To make things worse, graduates will not be able to overpay their loan or pay it off early, although the Government may change its mind on this. It means that for every £1 they earn, graduates who are basic rate taxpayers will lose 41p in income tax, National Insurance and student loan repayments. Higher rate taxpayers would lose 52p of every £1.