Compound Interest Debt Trap


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Sir, In “Young people had their say: are tuition fees ripe for rethinking? ”(July 1), Miranda Green refers to the“ mind-blowing ”6.1% interest rate applied on student loans starting this fall. In fact, student loans charge a compound monthly interest rate of 6.1%, as opposed to a simple rate of 6.1%. Monthly compound interest makes student loans bigger and last longer. It traps many student / graduate borrowers in a debt trap: their repayments are lower than increased loans. Borrowers are taken from day one in college when monthly compound interest begins to accumulate.

Less well-off students suffer twice as much from these punitive costs if they have maintenance loans as well as tuition loans. Because, instead of having loans of around £ 30,000 (tuition), their loans will be around £ 60,000 (tuition and maintenance loans). Imagine the monthly compound interest cost on that at 6.1%! As Albert Einstein would have said: “Compound interest is the eighth wonder of the world. Whoever understands it, deserves it. . . the one who doesn’t. . . pays it.

Despite this exorbitant and complex accusation, the Student loan company is more than discreet in informing students of its cost, which many say is “hidden in the fine print”. Borrowers, journalists and politicians find it hard to spot compound monthly interest rates. I believe that if we had better understood what education costs our graduates, the compound monthly rates would have been confined to the trash of immoral exploitation.

If student loans were regulated, neither punitive compound interest rates nor SLC’s inadequate explanations would be tolerated. But student loans have been cleverly removed from protective legislation, including section 8 of the Sale of Student Loans Act.

Estelle Clarke

Southampton, Hants, United Kingdom

Member of the Advisory Board, Intergenerational foundation

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