Hard pushed graduates hit as rate is doubled

The government this week more than doubled the interest to be charged on outstanding student loans in a move that will hit hundreds of thousands of college graduates.

From September 1, 2003 the annual interest rate went up from 1.3% to 3.1%, which will put an additional £100 a year on the outstanding balance owed on a £6,000 loan.

Each year the government uses the retail price index for March to determine the rate. While March 2002 saw inflation at one of its lowest levels ever, 1.3%, by March 2003 it had spiked up to 3.1%.

A spokesman for the Department of Education and Skills said: "Every year the student loan interest rate is equal to inflation. So the value of the student loan remains the same in real terms.

"This year's rise appears to have caused confusion. The government doesn't make a profit, and doesn't intend to make a profit on these loans.

"But it has to make sure loans keep their value based on the RPI. Even though there is an increase in cash terms, it does not increase the real amount owed. Graduates will always pay back the same amount in real terms."

The most immediate effect will be on graduates who took out endowment-style student loans, which were withdrawn at the end of the 1998-1999 academic year.

Their repayments are set over a fixed five-year period, so the interest rate rise translates into a hike in monthly payments.

More recent students who have the new-style loans, will not see a rise in monthly payments but will see their re payment period extended. Graduates who earn below the £21,364 threshold can apply to the Student Loans Company to defer repayments for a year at a time, which means they pay nothing. If the salary is above £21,364, a five-year, 60-month repayment schedule begins.

According to the DfES, the average amount owed under the old loans is £2,830, while under the new style it is around £7,000. It estimates that for someone with the typical size old-style loan, repayments will rise by just £10.19 a year. But for those who borrowed more pre-1998, especially students who studied in London, it is likely to make more of a difference.

Jessica Gunn, a journalist with Caterer and Hotel Keeper Magazine, says she is "shocked" by the rate increase. "It all seems a bit of a scam," she says.

Ms Gunn, 25, graduated from Birmingham in 2000 and borrowed approximately £3,000 under the old system. She already voluntarily pays above her set rate of £56 a month. "I've been paying £75, now I've moved up to £100. I don't want to be paying it back forever, especially if they continue to put interest rates up."

She says her fellow graduates are angry about the rise and their powerlessness to do anything about it. "You just sign up because you have to. And now there's nothing we can do. We're committed, we're legally bound."

Anger over student debt has prompted a unique protest by one student burdened with a £15,000 loan.

Mark McGowan, 37, a fine artist, is rolling a monkey nut using his nose for seven miles along some of London's busiest roads from outside Goldsmiths College in New Cross, in the south east to 10 Downing Street. Mr McGowan has also written to Tony Blair and education secretary Charles Clarke asking them to cancel his debts if he pulls off the feat - but has so far not had a reply.

The cheapest way to borrow

The Student Loans Company is government run and is the cheapest way to borrow. There are strict limits on how much can be borrowed each year. This academic year (2003/04) the maximum amount available for students in London is £4,930. Students elsewhere can borrow £4,000 and those living at home £3,165. All students are eligible for 75% of the loan, regardless of any other income. The remaining 25% depends on a means test on the student's and the family's income and an assessment by the local education authority. The LEA will calculate how much of the loan a student is entitled to. Students should apply for it as soon as they have an offer of a place.

There are new transfer arrangements for funds, via the BACS electronic banking system, which will deposit the loan directly into a bank or building society account at the beginning of each term. Graduates start repaying their loans as soon as they are earning £10,000, rising to £15,000 in 2006. Repayments are calculated as a percentage of income above a threshold of £833.33 per month.