WIREDGOV

The government's refusal to change the interest rate on student loans from the retail prices index (RPI) to the consumer prices index (CPI) - despite already doing so for key benefits, tax thresholds and public sector pensions - will leave graduates thousands of pounds deeper in debt, the TUC warns today (Tuesday).

The RPI inflation figure for March, published later today, is crucial for many graduates as it is used to set the interest rate on student loans from the following September.

While some graduates are currently paying back their student loans at 1.5 per cent due to historically low Bank of England interest rates, RPI is the most common method for calculating the interest rate on student loans - and the only method for those taking out loans before 1998.

A TUC analysis has found that a graduate with a student loan of £25,000 and on the average graduate salary will pay an extra £4,800 and take two years longer to pay off their student loan if it is uprated by RPI rather than CPI.

Graduates with higher levels of debt, lower earnings growth or broken career patterns, for example if they stop working full-time to look after children, will pay an even greater amount, says the TUC.

The use of RPI will be even more costly for students yet to go to university as the Education Bill currently going through Parliament includes a clause allowing ministers to charge up to commercial loan rates (RPI plus three per cent) for future student loans.

With tuition fees set to treble and the cost of student loans rising, sticking with RPI will cost students many more thousands of pounds, the TUC warns.

The TUC opposes the switch to CPI for benefits, pensions, tax thresholds and tax credits as it believes the change fails to recognise the true cost of living, reduces the real value of pensions and benefits, and drags thousands more people into higher rate tax. The TUC would like to see the link to CPI scrapped before next year's benefits upratings are decided.

By using the higher inflation measure (RPI) for state-set receipts, such as student loans and limits on utility bill and transport fare rises, and the lower measure (CPI) for state payments, such as Jobseeker's Allowance and income tax thresholds, the government is squeezing the incomes of working families, commuters and graduates, says the TUC.

The TUC believes that the government is effectively using indexation to fiddle the system against those who save for their retirement and take out student loans to further their education - behaviour that the government should be rewarding not punishing.

TUC General Secretary Brendan Barber said: 'The government claims that CPI is a better way to uprate benefits and pensions.

'But ministers' refusal to extend the CPI switch to student loans proves the change is simply a sneaky way to cut benefits, tax credits and pensions, and to get more people to pay a higher tax rate.

'Selectively sticking with RPI will add thousands of pounds to graduates' debts and lead to higher utility bills and transport fares for everyone. At the same time households across the UK will be worse off as the value of their benefits, tax credits and pensions rise more slowly.

'The government should own up to this stealth cut and scrap CPI indexation on benefits, tax credits and pensions. Ministers should remember that rising household debt helped cause the recent recession and this change will only make the growing income squeeze worse.'

NOTES TO EDITORS:

Comparison cost of repaying student loans, RPI and CPI

- All figures are approximate, the calculations are available at www.tuc.org.uk/tucfiles/5/studentloanrepayments.xls

- The TUC figures are based on average graduate earnings from the age of 22 to 64. The data used for average graduate earnings is available from the Office for National Statistics at www.statistics.gov.uk/CCI/nugget.asp?ID=1166

- The interest rates for student loans are set at 2 per cent for CPI (the target rate for the Bank of England) and 2.87 per cent for RPI, in line with the government's projections for the long run difference between CPI and RPI www.dwp.gov.uk/docs/cpi-private-pensions-consultation-ia.pdf - According to the Student Loans Company, the interest rate is based on the annual Retail Price Index (RPI) in March or the highest base rate of a number of major banks plus 1 per cent, whichever is lower. Until 5 December 2008, the rate was based on RPI www.slc.co.uk/statistics/facts%20and%20%20figures/previous_interest_rates.html

- Fixed term loans were taken out before 1998. They are paid over a fixed term (also known as 'mortgage-style') and the interest is linked solely to RPI. Further information is available at www.slc.co.uk

- According to the Office for Budget Responsibility, household debt is expected to rise from £1,535 billion in 2009 to £2,126 billion in 2015. The figures are available at http://budgetresponsibility.independent.gov.uk/econ-fiscal-outlook-march.html

- Further analysis of the inflation indexation switch is available at www.touchstoneblog.org.uk

- All TUC press releases can be found at www.tuc.org.uk

- Register for the TUC's press extranet: a service exclusive to journalists wanting to access pre-embargo releases and reports from the TUC. Visit www.tuc.org.uk/pressextranet