Top universities call for higher interest rates on student loans

Higher education is facing a deficit that could top 1.1bn by 2012-13, and action must be taken to pump more investment into the system, according to the Russell Group, which represents the UK's 20 leading research universities including Leeds and Sheffield.

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". It adds that further investment will be needed if they are to "maintain and build on recent improvements and continue to provide an internationally excellent learning environment".

The independent review began in November, led by the former BP chief, and is due to make its recommendations on the future of the fees policy and financial support for students by the Autumn.

Both vice-chancellors and business leaders have called for higher fees, which currently stand at a maximum of 3,225 per year, warning the UK's competitiveness and expertise could be at risk if investment cannot be maintained.

In its submission, the Russell Group, which is headed by chairman Prof Michael Arthur, vice chancellor of Leeds University, says the UK's funding system is "one of the most generous in the world, providing all students with in-built insurance against spiralling debt and inability to repay".

Students begin to pay back their loans when they start earning 15,000 a year or more, and at a low interest rate.

"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," the groups argues. "Moreover, it is a subsidy which is targeted towards better-off graduates. As it represents a re-distribution 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.

Citing an example of current funding shortfalls, the submission says that it cost 14,190 to teach a chemistry undergraduate at a Russell Group university in 2007/08. The institution received 10,570 from tuition fees and grants - leaving a funding gap of 3,620.

The group suggests there are three "realistic" ways to remedy the levels of annual deficits:

reduce costs by cutting staff;

increase income through raising fees for home undergraduates;

increase income through increasing fees for overseas students.

Russell Group published the submission today following pressure from students.