Tuesday, October 26, 2010

Penalty for graduates who pay off student loans early


Graduates who wish to avoid being burdened with decades of debt could be hit with mortgage-style redemption penalties if they pay off their student loan early.

The fees, likely to run to thousands of pounds, would also be levied on parents who opted to pay upfront for the cost of putting their child through university to save them from being saddled with long-term debt.

In last week's spending review, George Osborne, the Chancellor, confirmed that university fees would rise from their current rate of £3,290 from start of the 2012 academic year. Any new upper limit has yet to be set, but Nick Clegg, the Deputy Prime Minister, confirmed the Government would reject the recommendation of the recent review of university financing that the cap on university fees be lifted altogether.

Ministers are understood to be looking at a new cap of about £7,000-a-year. This would be funded by loans with tiered rates of interest depending on how much the graduate earns in future.

A redemption penalty would stop the better-off avoiding higher interest rates by paying off a loan early – and would be seen as a sop to Liberal Democrats who have been criticised over the tuition fees rise after signing a pre-election pledge to scrap them altogether.

Lord Browne, the former head of BP who led the review, had suggested that no redemption penalty be imposed.

But Vince Cable, the Business Secretary, confirmed that ministers were examining ways to make the new system more "progressive".

He said: "High-earning graduates will be paying more later in their life, but in a progressive way relating to their ability to pay.

"There is an issue about people who go on to very high-earning jobs and who therefore pay off relatively quickly and we do have to think about how to find a way by which they make some sort of contribution towards low-earning graduates.

"It's a tricky technical problem but we're working on it.

Mr Cable confirmed that ministers had already decided not to proceed with Lord Browne's suggestion that universities be permitted to charge unlimited amounts, with a levy on any fee above £6,000 to be paid to the Government to spend on bursaries and grants.

"I don't think there's any prospect of having unlimited fees – that simply isn't going to arise," he told Sky News.

"We're looking at this very carefully, what Browne had to say – but I think that particular approach was one we're not going to pursue."

His words echoed those of fellow Liberal Democrat Mr Clegg, who told The Andrew Marr Show: "I am uneasy about the idea that you, in theory, have unlimited fees. So we are looking at something which would be more restrained."

The Lib Dem leadership is braced for a sizeable rebellion by the party's backbenchers when the plans come before Parliament.

Simon Hughes, the deputy Lib Dem leader, suggested that he would be prepared to back a rebellion if the Government applied the penalty to less wealthy students.

He told Channel 4 News: "The internal debate in the party has not finished and the debate within Government has not finished

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