Student loan shock: how 50,000 graduates are charged penalty rates that add millions to their loans

The Telegraph reports that more than 50,000 graduates a year are being charged “absurdly high” penalty interest rates on their student loans because of a little-known quirk of the system.

As a result, as much as £75m in additional interest could be being added to these graduates’ loans this year, Telegraph Money can disclose.

Anyone who took out a student loan since 2012 has done so under the “plan 2” system. This operates in a far more complex way than the previous regimes. 

The interest on loans while students are studying is the rate of inflation, as measured by the retail prices index (RPI), plus 3 percentage points. Because inflation was high last year, these students have paid 6.1pc interest since September, a far higher rate than on pre-2012 loans. 

However, the highest rate of interest – currently 6.1pc – is also applied for “non-compliance”. This is where graduates do not respond to the Student Loans Company’s requests for information. The penalty rate is applied 42 days later.

Once the appropriate information is received, graduates are moved off the rate but the extra interest accrued is removed only for the previous month, a spokesman for the Student Loans Company confirmed.

Between April and October 2017, the most recent available data, the number was 47,910 – suggesting that the full-year figures will easily pass 2016’s total.

Angela Rayner, the shadow education secretary, said the figures showed “a deeply unfair system” and reiterated the Labour Party’s calls to scrap tuition fees entirely.

Read more about the complex loan scheme Student loan shock: how 50,000 graduates are charged penalty rates that add millions to their loans

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