Hike in loan interest rate 'would hit worst-off'

Commercial interest rates on student loans would penalise the poor far more than the rich, higher education minister Margaret Hodge said this week.

Ms Hodge was called to a special late-night sitting of the Commons' select committee on education and skills to elaborate on the student support review.

She told MPs: "The fact that we don't charge real interest rates is, of course, a subsidy to all students. But thinking that charging real interest would benefit those from lower socioeconomic groups is questionable."

Ms Hodge's advisers modelled the effects on the poor and the rich of charging a Treasury interest rate of 6 per cent plus another 2.3 per cent to account for inflation. They divided the population into ten groups, by wealth, and looked at the second poorest decile and the second richest.

Ms Hodge said that, under the present system, the second poorest would pay £12,700 over 14 years but, if interest rates were increased, that sum would rise to £28,300. A five-year career break would take the total to £59,000.

The second richest - who would earn more and pay back the loan more quickly - would pay back £11,000. If rates were increased, that would rise to £14,100. Even with a five-year career break, the total amount repaid would be £16,800 - three-and-a-half times less than the second poorest.

Ms Hodge said that students who owned their own homes - or whose parents did - would be better off putting their student debt on the mortgage. This option would not be available for those renting or living in social housing.

Ms Hodge said that top-up fees were "on the agenda" along with other options. For the past five years, universities have been prevented from receiving public money for teaching if they charge these fees. And former education secretary David Blunkett ruled them out for the lifetime of this parliament.