Thread: Interest rates on loans 2009-10

The rate for the coming year has been set above RPI on the March "marker" rate. Is this legal, given the wording of the agreements signed between Students and the SLC? Any legal opinion welcome.

I have written to David Lammy (minister for Universities) and shadow ministers David Willets and Stephen Williams. Will post replies as I get them.

Letter read:

"I have just read on the Government's web site (How Student Loan repayments are worked out (courses starting from 1998) : Directgov - Education and learning)
that it is your intention to adjust the interest rate on student loans to 0% for the coming year (for students who started after 1998) rather than to adjust for the actual fall in RPI, which is -0.4% for the 'marker' month of March.
There is no justification given for the disparity between it and the RPI, nor for the different treatment of pre- and post- 1998 loans.

This not only is a breach of the trust which, we are assured, Parliament is currently doing everything possible to restore between itself and the electorate, but I also believe that cannot be contractually legal or enforceable.

The basis of the contract for my younger son was his application (of which I have a copy) for a loan commencing in October 2006. The application declaration which he was required to sign makes no mention of interest payments, but paragraph (b) states " I have read and understood the booklet 'Student Loans: A Guide to terms and conditions"'. That booklet says on page 10 under the heading Interest:-

"Although student loans are contracts which can be enforced by the civil courts, they are not profitmaking loans. The Government subsidises the actual cost of interest on the loans, so they do not attract the same rates of interest that you would be charged if you were to take out a loan from a bank or building society. However, to make sure that all borrowers pay back the same amount that they borrowed, the Government has to keep the value of what is owed in line with the general rate of inflation. This is done by working out the rate of inflation each year as defined by the Retail Prices Index (RPI) and fixing the interest charged to that rate. The aim is to maintain the value, in real terms, of the outstanding amount of the loan. This means that however long it takes you to repay your loan, you will repay no more, in real terms, than you actually borrowed."

I have taken the liberty of emboldening the most relevant parts of the text.

You may remember that last year, when inflation in March hit an exceptional 4.8%, students were told that they had to accept it because that is the way the system was set up. If it was true then, it is true now.

I do not have to hand copies of the documentation for my older son, who is still paying off his loan, but I imagine that the same statements were made with his loan application.

I have a copy of my son's loan statement dated August 2008 which shows that he owed the SLC £ 13,314 then - it will be about £20k with the 3rd year fees, maintenance and interest by the time he finishes and which he is due to start repaying in 2010. Whilst I appreciate that the difference in interest on this sum may seem relatively trivial, there is, nevertheless a principle at stake here - that contracts should be honoured and not arbitrarily and unilaterally varied.

At a time when the Government says that it (a) needs and wants to re-establish trust with the electorate, (b) wants to encourage more youngsters into higher education and (c) engage more people in the political process, then reneaguing on contracts is not the way to go about it.

I look forward to hearing from you"

With a normal disputed contract, I would pay the undisputed part whilst the disputed part was being resolved, but given that HMRC extract money directly from salary, I don't see how this can be done. - any ideas?

But the agreement says that my son's post 2006 loan is defined by "the rate of inflation each year as defined by the Retail Prices Index (RPI) and fixing the interest charged to that rate". No mention of BoE minimum lending rates.
So how can the government unilaterally change the conditions of the loan without abrogating the contract? I

- 0.4 that great news on my 6K loan thats 25 quid less a year, not a lot but i only pay them a token 10 a month so 2 AND HALF MONTHS for FREE!

any idea why SL don't take me to court? I've been making token payments for about three years. get the odd letter from thesis which i igrore. SLC and smith lawson have given up on me. ( for now )

I have today, via my MP, received a letter from David Lammy, Minister with responsibility for Universities. In it he says:-

“I note Mr Xxxxx has concerns about how interest rates are calculated on outstanding student loans. Student loans are subsidised by Government and attract a low cost interest rate, compared to commercial loans. As Mr Xxxxx already knows, the interest rate is generally based on the annual March Retail Price Index (RPI) or the highest base rate of a number of major banks plus 1 %; whichever is lower. However, the Secretary of State has the power (under section 22(3) of the Teaching and Higher Education Act 1998) to decide not to set a rate. The corresponding regulation is 21(6) of The Education (Student Loans) (Repayment) Regulations 2009 (SI 470) which is available to view at: http://www.opsi.gov.uk/si/si2009/uksi 20090470 en 1

Whilst to date the RPI has set the student loan interest rate for the following academic year (1 September - 31 August), the law allows Government not to set an interest rate: effectively making the rate 0%. The Student Loans Company (SLC) will apply 0% interest rate from 1 September 2009 to 31 August 2010 across the UK.

The repayment threshold will also remain at £15,000 for the next 12 months. Had the Government used a negative RPI rate to calculate this, the threshold would have also reduced and borrowers would have started repaying earlier and ended up paying more. Monthly repayments of student loans are made at a rate of 9% on income above this threshold. Setting the interest rate at 0% has no impact on the monthly repayment of those graduates already in repayment.”

I think that this is totally unacceptable – parts are simply incorrect, and I believe that it is written with the intention to deliberately mislead. I have responded via my MP:-

“Thank you for forwarding David Lammy’s letter to you in response to my e-mail. I have to say that I find it less than helpful – in fact, positively and deliberately misleading:-

Firstly, he says that “had the Government used a negative RPI” (to adjust the repayment threshold), “borrowers would have started repaying earlier and ended up paying more”. Whilst the first half may be true, the second is not. As the interest is calculated on a compound basis, the loan would be paid off sooner and hence the overall cost would NOT be greater.
The fact of the matter is that, again because the interest is compounded, the effects of the additional 0.4% interest for the coming year will be added to the interest burden for every year until the loan is fully repaid, adding to the overall cost – so on this, he is just plain wrong.

Secondly, the implication of the above statement is that the repayment threshold varies from year to year with RPI. It does not. It has been fixed at £15,000 pa since 2004/5. There is an unequivocal statement to this effect in the Student Loans Guide terms and conditions booklet 2006/2007. There is no caveat suggesting that there are circumstances under which this threshold could or will be varied.

Equally, Mr Lammy is being disingenuous in saying that “Setting the interest rate at 0% has no impact on the monthly repayment of those graduates already in repayment” – true in itself, but grossly misleading as those graduates already in repayment will be indebted for a longer period of time and end up paying more overall.

He refers to the 2009 (SI 470) regulations to justify not setting a rate for the coming year. I hardly need point out that these were issued some two and a half years after my son contracted his loan on the basis of terms and conditions in the Student Loans Guide and which promised a direct link to the March RPI. Whilst the wording of the contract does refer to the Act “as amended from time to time” , I really do find it difficult to believe that a Court would find this to be a fair contract condition, given that it is aimed at 18 year olds of average intelligence (by definition, as the Government’s aim is for 50% entry into HE) with no legal training and who may or may not have Internet access to access all the documentation.

I note that Mr Lammy also refers to the Teaching and Higher Education Act 1998, section 22 (3) for his justification. I assume that he is referring to clause (a) which says -
“for such loans to bear compound interest at such rates, and calculated in such manner, as may be prescribed from time to time”
I think that most reasonable people would read this to mean that the basis of the interest rate calculation can be changed for new loans without the need for a new Act of Parliament, but I cannot find any reference in the 1998 Act to suggest that the basis for interest rate calculation can be changed for existing loans once they are in force.

I would also point out that in section 4 (a) (i) of this 1998 Act, the Secretary of State is put under an obligation to ensure that the rates
“shall be no higher than those ………. required to maintain the value in real terms of the outstanding amounts of such loans”.
Quite evidently the real value (i.e. cost to the student) of the loans is being increased by his refusal to set a rate commensurate with the fall in RPI. He has therefore failed to meet that legal obligation.

I am very disappointed with his response which seems determined to obfuscate the issue. At the end of the day, a contract was agreed on the basis that any student would only have to “pay back the same amount that they borrowed” after adjustment for RPI (p. 10 of Student Loans Guide). The imposition of any additional interest is at best a breach of the promise made by the Government – in my view, it is a legally unenforceable unilateral change of contract terms.

I would be grateful if you would take up the matter again with Mr Lammy. With the benefit of his legal training, I would hope for a better reasoned and more cogent response which actually addresses the issue in terms of the undertakings given by Government (both in publications and in speeches) and the “fairness” of the terms to which students are required to sign in order to have access to the loan facility.”

If I get a better response, I will post it. Meanwhile, does anyone have a legal view about challenging the decision on the basis that, whilst allowed for under the Act, it should be considered unreasonable to expect a schoolchild to understand that they are effectively signing a document which allows the Government to do whatever they like on a Minister’s whim?

brilliant job, I noticed this too and thought it was unfair. The websites are set-up to be very easily read by young people and they state that you effectively pay back the exact value of the loan.

It's good to see that someone is challenging this, I will be following this thread closely.

Keep up the good work!