Students could face £12,000 loan interest

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High-earning graduates could face paying £12,000 interest on their student debts under a shake-up of university funding, according to a new report by the Institute for Fiscal Studies.

'Free' student loans available at a zero real terms rate of interest would be scrapped and rates of up to five per cent imposed. At the same time, tuition fees could rise from £3,200-a-year to £5,000.

The scenario would mean the top ten per cent of graduate earners paying interest of £11,800 on student debts for a three-year degree which has already cost them about £26,000 in tuition fees and living expenses.

The extra contributions - which amount to 'profits' the Government can use to subsidise poorer graduates - would take the total cost of a typical degree course close to £40,000.

Average earners would also pay more for a university education than they do now while graduates with the lowest incomes would be heavily subsidised.

The big hike in interest charges is one of a range of scenarios for the future of higher education funding unveiled by the Institute for Fiscal Studies

The report is likely to heavily influence a high-level independent review of university funding backed by both Labour and the Tories, due to report in the autumn.

The inquiry - due to report in the autumn - is considering whether to raise the current cap on tuition fees and overhaul student financial support including the system of grants and loans.

But the report suggests that a hike in tuition fees would need to be accompanied by the phasing out of zero interest rates to keep down the costs to the taxpayer.

Alissa Goodman, one of the report's authors, said: "It would mean big contributions from the rich and big subsidies to the poor."

However she warned that any hike in fees or changes to repayment rates could result in significant changes in students' behaviour - such as making 'over-payments' to get rid of their debt more quickly to avoid accruing interest or avoiding university altogether.

The findings from the IFS follow a report last year from the CBI which called for middle-class students to pay significantly more for a university education.

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