Student Finance loans 'illegal and unenforceable', says top lawyer

Exclusive: Equity laws restated during the recent High Court Brexit case could provide hope for those being 'exploited' by 'mis-sold' student loans, argues Estelle Clarke

Rachael Pells
Education Correspondent
Thursday 10 November 2016 18:24
Graduates in England rack up debts higher than anywhere else in the English speaking world
Graduates in England rack up debts higher than anywhere else in the English speaking world

Government student loans are “illegal” and “unenforceable”, a top lawyer has said, arguing that graduates must be reimbursed for signing misleading contracts at extortionate interest rates.

Students graduating from university this year face rates of 4.6 per cent on government loans, which cover tuition fees, living costs and repayable grants.

Concerns have been raised about the soaring cost of the loans, which could leave graduates paying out more than £100,000 – double the amount initially borrowed - according to independent analysts.

But Estelle Clarke, a former City lawyer and fair loans campaigner, has argued that the government loans are sold deceptively, tying students into contracts with rates that are closer to 6.6 per cent.

This is because the 4.6 per cent rate cited is compounded monthly, meaning every month unpaid charges are added on to the original loan.

“Extortionate funding costs and unfair terms are forced upon students in unknown ‘agreements’ which break the law,” she said. “If students ask to negotiate, they meet a brick wall.”

Writing for The Independent, Ms Clarke argued that the recent High Court ruling on Brexit could in fact provide hope for campaigners against “exploitative” student loans, due to old and highly specialised laws of Equity that protect consumers from “unconscionable” agreements.

Ms Clarke said: “Students are being taken for a ride with their student financing. In the UK, laws of Equity protect people from being exploited by “unconscionable” agreements like these.

"The recent Article 50 Judgment restated Equity’s priority and government’s acceptance of this.

“Students also have legislative protection from ‘extortionate credit bargains’,” she explained, “which loans have become. That is why student loans are no longer legal, in whole or in part.”

Students in England are said to leave university faced with some of the highest debts the world – owing significantly more than their US, Australian and Canadian peers.

“When introduced in 1998, government student loans were relatively fair,” said Ms Clarke. “Since then, they have changed so much they have become illegal: tested in court, they’d be ruled unenforceable.

“On top of this, hidden amongst students’ expenses is a hefty portion of investor profit: student loans are lining the pockets of third party fat cats,” said Ms Clarke.

High Court rules Government cannot trigger Article 50 without parliamentary approval

“Impoverished students use their loans to pay returns to the wealthy, at ruinous cost, without even knowing they are doing so.”

Last year Simon Crowther, a civil engineering student at Nottingham University, made headlines for contesting the legality of his student loan in an open letter to his MP.

He was in the first wave of students faced with £9,000 tuition fees and prompted a number of similar complaints from students who claim they were mis-sold their loans.

“The government needs to act before it has a national scandal on its hands,” Ms Clarke added, “Theresa May must repay students the amounts they overpaid David Cameron’s government.

“Student loans should have interest removed or charges capped at 1.25 per cent, not compounding. Loan agreements should be given to students so they know what they are signing.

“When such reforms are done and investor profit stops being students’ responsibility, student loans will start being legal.”

Last month it was revealed that more than 300,000 graduates had received refunds from the government-owned Student Loans Company after being wrongly overcharged in their loan repayments.

A spokesperson for the Department for Education said: “Interest rates are linked to RPI to ensure that student funding remains sustainable in the long term. There is extensive information and support to help borrowers understand the loan terms, and they must sign a declaration that they have done so.

“As the OECD has recognised, our student funding system is sustainable with a relatively high threshold before borrowers have to repay their loan.

"It removes financial barriers for anyone hoping to study with outstanding debt written off after 30 years. Graduates enjoy a considerable wage premium over non-graduates and repay their loans in line with income - at a rate of 9 per cent of earnings above £21,000.”

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