Only a quarter of all graduates will pay off loans

The rest in debt for life as Government's own figures suggest new university fees system is unsustainable.

Only one in four graduates will pay back the full cost of their tuition fees under the coalition's new system for financing higher education in England.

Internal government figures, seen by The Independent on Sunday, reveal that a small minority of students paying fees of up to £9,000 a year are expected ever to pay them off in full. Ministers believe most graduates will spend their whole working lives making monthly payments to cover their loans and interest – without ever being able to settle their debts.

The planning assumptions raise questions about the sustainability of the new system, just days after the Deputy Prime Minister, Nick Clegg, survived rebellion among his own Liberal Democrat MPs to get the proposals through the House of Commons.

A briefing note from the Department for Business, Innovation and Skills (BIS) has revealed that: 25 per cent of graduates will repay "at least 100 per cent of the original value of their loans in PV [present value] terms"; the "best-case scenario" foresees a maximum of only half of graduates settling their debts; up to 60 per cent will never pay in full.

Labour last night claimed the assumptions underpinning the new system raised questions over its sustainability, for graduates and universities alike.

The shadow universities minister Gareth Thomas said: "The Government's figures look more and more questionable.

"When even they think such a high number of students will not be able to repay their loans in full, it underlines just how unfair and unsustainable it is trebling student fees."

The Government has ruled that students must foot the bill for improvements in the higher education sector by allowing universities to raise their cap on tuition fees from £3,290 to £9,000 a year. But ministers ruled out an across-the-board "graduate tax" in favour of student loans, repaid when graduates enter the jobs market.

To improve the "progressivity" of the system, the Secretary of State for Business, Vince Cable, decided that graduates would be required to start repayments only once their salary reached £21,000. During the crucial debate in the Commons last week, he said: "We are introducing variable interest rates so that those on high incomes pay relatively more to ensure the progressivity of the scheme."

Clegg claimed that the "graduate contribution scheme" was fairer than the graduate tax proposal advocated by the National Union of Students. The Government will pay 30 per cent of the cost of the loans issued, to subsidise the preferential interest rates and cover losses through defaults.

The Office for Budget Responsibility estimates that the Government will have to borrow £10.7bn to pay out student loans in 2015-16, compared with £4.1bn at the moment – with all but £1bn of the £6.6bn increase due to the tuition fees reforms. It has emerged that the Government is assuming that the bulk of public investment in the new system "will be repaid by high-earning graduates".

But, despite the suggestion that the highest earners would carry most of the burden, an accountant last night warned that the lowest-earning graduates would not be protected, even if their salary remained below the payback threshold. Peter West said the combination of inflation and interest charges meant many graduates, including teachers, would never reduce the amount owed.

He said: "The Government tells us that those earning under £21,000 will not have to pay interest on their loans. But they will have to pay inflation in line with the Retail Prices Index, which is currently 3 per cent higher than the base rate of inflation.

"If you ask anyone what paying no interest on a debt means, they would say the amount owed stays the same. The Government is being dishonest about the implications of this system."

But Cable claimed that the new rules were "fairer than the present system of student finance, and affordable for the nation". He says a quarter of students will pay less than at present.

He added: "There must be a link between the financial advantages conferred by a degree and the contribution made by the graduate. A high-earning banker or lawyer should pay more than a nurse or youth worker."

The damage from the proposals for the Lib Dems was made clear last night with polls in the Sunday Telegraph and News of the World showing the party is likely to lose half its support at the next general election. Clegg's personal ratings have also collapsed.

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