Student loans: Better the interest rate you know...

Newspaper reports over the weekend told us that interest rates on student loans have doubled. It's not good news - anything that increases graduate debt is unhelpful, especially given that many are in such precarious financial positions after they leave university.

However, while we have had our fair share of issues with the Student Loans Company in the past, we can't blame it for this decision. The laws governing student loan interest rates set the rate for each academic year (September to September) based on one of the measures of inflation - the Retail Price Index (RPI) - for the preceding March.

Unfortunately for borrowers this year, March saw a peak in inflation and, as the rate had been rather low the year before, the jump is higher than usual. Hopefully it won't last - the RPI has already declined to 3.8% in July, and if the current trend continues, it should be lower still by March.

Interest rates do fluctuate with the economy - and when the economy lurches we are all affected. Mortgage rates can go up, savings can be devalued, and interest rates on student loans can increase.

And, while interest rates do rise and fall, no one makes any profit from student debt, as things stand.

Government policy is to keep inflation low, and the Bank of England has already acted to try to reduce the rate. If it succeeds, this will be reflected in future student loan interest rates.

There may well be a better way of linking student loans with inflation - the government has recently changed its principal measure of inflation to the Consumer Price Index (CPI), which has, at least recently, been lower than the measurement for RPI. However, the basic principle is one that is, as far as is possible, fair.

But to focus on which measurement of inflation we use would be to ignore the real danger: that students could be presented with commercial rates on student loans as an alternative. If an increase in RPI can have such a detrimental impact on graduate debt, a rate of interest designed to make profit from student loans, as is proposed by some economists, would be disastrous. Just ask American students, who face much higher rates than UK students.

The scale of public anger directed at the US government - which allowed companies to make obscene profits from students who had little choice but to take the loans - should be a stark warning to ministers on this side of the pond.