An influential committee of MPs and student groups have called on the government to change the way it charges interest on student loans as part of a wide-ranging review of higher education finances.
The House of Commons Treasury Select Committee said in a report released on Sunday morning that the measure of inflation used to calculate repayments — the retail price index (RPI) — should be ditched in favour of the consumer price index (CPI) which is typically lower.
"The Committee is unconvinced that the interest rates currently charged on student loans can be justified on re-distributive grounds," the report reads. "Nor has any other persuasive explanation been provided for why student loan interest rates should exceed those prevailing in the market, the Government’s own cost of borrowing, and the rate of inflation.
"It is incumbent on the Government to ensure that the student loan system is well explained so that prospective students and their families are able to make well informed decisions."
The committee added that it was unfair to charge students a commercial rate of interest while they are studying and called this a "punitive" measure.
Graduates currently repay their loans at the RPI rate — which currently stands at 3.1% — if they earn up to £21,0000. And they pay RPI plus 3% if they earn £41,000 or more, meaning a total of 6.1%, until the loan is paid off or 30 years have elapsed.
Those in that higher category can end up paying back £93,000 in total.
The government has already pledged to carry out a full review of higher education funding, but Jo Johnson, the former universities minister, ruled out a "radical change to the core architecture [of the student loan system]."
NUS Vice President Amatey Doku said in a statement: “We are pleased that the select committee has recognised the need to use CPI to calculate interest rates. The hike to 6.1% was entirely misjudged.
"We are also pleased that there is an appetite for undoing some of the recent damaging education funding reforms, but we need to be clear: cutting interest rates will not solve the problem. Students will still leave university with debt they can never repay, low and middle earners will still pay more with every batch of new graduates, and the poorest students will still suffer the most."
The report also criticised the government for converting the student loan book to cash, which could make the spending deficit look better than if the loans were allowed to expire unpaid.
Angela Rayner, Labour's shadow education secretary, told BuzzFeed News: “The Government’s student loans system is unsustainable and failing both students and taxpayers.
“The current system hides the true cost, with taxpayers on the hook as billions of pounds of debt every year is written off.
"The 'fiscal illusion' of selling the student loan book achieves nothing but to disguise their shambolic record on the public finances.
"The next Labour Government has a fully-costed plan to scrap tuition fees in higher education and further education colleges and bring back maintenance grants and EMA to make our system of student finance fair and sustainable.”
In 2012 the maximum amount university students could be charged per year increased from £3,000 to £9,000. While loans were also expanded to cover this, teaching grants were cut significantly.
And as the committee's report points out, the majority of students will, in fact, not pay back their loans, largely because they won't earn enough to pay back the full amount within a 30-year deadline. The Institute For Fiscal Studies estimates that 83% of students who graduate after 2012 will fail to pay back their debt, while the Department for Education puts the figure at between 60% and 65%, and ministers have argued that the write-offs are an intentional part of the plan.
The net effect of this is that as much as 45% of the total £89 billion outstanding loan balance will not be repaid by students.
A Department for Education spokesperson said: "Our student finance system has many strengths. We have removed upfront barriers to entry and are seeing record numbers of 18-year-olds from disadvantaged backgrounds now going to university. Furthermore, graduates do not pay back anything until they are earning over £21,000 – rising to £25,000 from April.
"We will shortly be conducting a major review of post-18 education to build on the action we’ve already taken and ensure a joined-up system that works for everyone. We welcome this report from the Treasury Select Committee, which will be considered as part of the evidence base for the review."