Dear Mr Denham,

I am writing with regard to the mechanism used for linking the interest rate for student loans to inflation.

I understand that the mechanism for making this link follows a formula laid down in legislation, whereby interest is changed annually in line with the retail prices index (RPI) for the preceding March. I am concerned that this mechanism increases the chance of uneven and excessive increases, as has been the case this year.

The mechanism by which interest for student loans is calculated is not typical of other similar mechanisms. Although many state benefits, such as Child Benefit, Incapacity Benefit and Disability Living Allowance are linked with RPI, the default procedure used in these cases is to take, in September, the average RPI over the preceding 12 months. This takes account of, and mitigates, inflation fluctuations during the period.

As you may know, an Early Day Motion has been tabled in the House of Commons on this issue, following the doubling of interest rates from 2.4 percent to 4.8 percent in September this year. This EDM has been signed by 34 Members of Parliament. There is a concern, shared by NUS, that the higher rate of 4.8 percent will cause a serious deterrent on taking student loans, and in turn may negatively influence HE applications. We have received a number of letters from students and graduates concerned about the recent rise, and a number of groups on the social networking site ‘Facebook’ have been formed, with a combined total of more than 50,000 members, objecting to the increase.

NUS believes that any changes to the interest rate for student loans, to account for inflation, must be fair - and must be seen to be fair. We urge you to change the mechanism by which these rate changes are made, to use a system by which the calculation is made on the basis of the average RPI over a twelve-month period. We further believe there may be a good opportunity to make any legislative changes required through amendments to the Sale of Student Loans Bill, currently before Parliament.

I look forward to hearing your thoughts on this important matter.

Yours sincerely,

Gemma Tumelty

National President, NUS

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