Changes to student loans system mooted

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Graduates could be made to pay back their loans earlier and at a higher interest rate, the UK's top universities suggest today.

Higher education is facing a deficit that could top £1.1bn and action must be taken to pump more investment into the system, according to the Russell Group, which represents the UK's 20 leading universities.

In their submission to Lord Browne's independent review of the student funding system, the group warns the financial sustainability of its universities is "severely at risk".

Under the current system, students begin to pay back their loans when they start earning £15,000 a year or more, and at a low interest rate.

It says: "The lack of a real rate of interest on student loans is therefore a subsidy which imposes high costs on the Government, and which exceeds the requirements of ensuring fair access to higher education.

"Moreover, it is a subsidy which is targeted towards better-off graduates. As it represents a redistribution of funds from the worse-off to the best-off, it is therefore a highly regressive policy.

"One way of modifying the current system is therefore that student loans should carry a real rate of interest, one which would be equivalent to the Government's overall cost of borrowing."

It adds that the public costs of funding the student finance system could be reduced by lowering the threshold at which graduates begin paying back loans – which means they would begin paying them back earlier.

The rate of repayment could also be increased, which could have an impact on the size of the contributions made.

The submission says: "The current system of student support could be made more sustainable through addressing some of the poorly targeted and excessive subsidies provided."

But although the submission stops short of suggesting higher tuition fees for UK students, it appears to indicate that other solutions may not be fully workable.

Reducing the deficit through cost cutting would mean the equivalent of axing thousands of staff across the Russell Group, it suggests.

Lord Browne's review is due to report to Parliament in the autumn.

Both vice-chancellors and the business sector have called for higher tuition fees in the past.

Tuition fees currently stand at a maximum of £3,225 per year.