Interest rate cap: finance minister backed Letschert into a corner

The Ministry of Finance called an interest rate cap on student loans an absolute no-go. It was unwilling to take any risks, documents made public by the cabinet on Thursday show.

Several opposition parties grilled education minister Rianne Letschert (D66) on Thursday morning over the scrapping of the interest rate measure for student loans. This happened during the debate on the 2027 budget for the Ministry of Education, Culture and Science.

The coalition had initially wanted to cap the interest rate charged by DUO at 2.5 per cent, but on reflection considers this too expensive. The rate is linked to the interest paid by the state, which is rising faster than expected.

The opposition had little sympathy for this turn of events. Of course the interest rate could rise, it argued. The cap had been designed precisely to protect students against that risk. How could the cabinet break its promise and suddenly say it would be too expensive? Harsh words were uttered.

Unfortunate

Letschert had little to say about it, other than that she felt sorry for students. The opposition was not satisfied with that. It demanded more information about how the discussions had unfolded within the coalition and between the ministries of Education and Finance.

That information was subsequently made public. The documents show that finance minister Eelco Heinen (VVD) backed Letschert into a corner. His ministry wanted ‘zero risk’, according to a memo prepared for the minister ahead of a meeting with his colleagues at the Ministry of Finance.

The Ministry of Education wanted the risks to fall on the public purse. If interest rates rose, Finance would have to cover the cost. If Education had to pay for it itself, support for current and former students would lead to cuts to education.

Defeating the purpose

Finance suggested strange alternatives, such as scrapping the measure if the interest rate became too high. That would mean the interest rate charged by DUO could still exceed the cap. This approach ‘completely defeats the purpose and goes against the agreements in the coalition agreement’, Education officials noted.

So the deadlock remained. In the end, Letschert decided to use the money (40 million euros) in another way to improve students’ financial position.

The documents show that the risk associated with the interest rate measure was known in advance: officials warned of the uncertainties. The three governing parties, D66, CDA and VVD, therefore agreed to it knowingly and deliberately.

Alternatives

Opposition proposals to find extra money elsewhere – by giving less support to businesses or taxing wealth more heavily – were not considered in discussions with Finance, according to Letschert’s accompanying letter.