Student loan interest to rocket to 6.1%
The headline interest rate charged on post-2012 student loans in England and Wales will increase to up to 6.1% in September.
The interest charged is set at 3% plus the Retail Prices Index (RPI) inflation rate. With March’s RPI standing at 3.1%, as announced yesterday, this means students will be hit with interest charges of up to 6.1% from September.
All current students will pay this rate of interest until after they have finished their studies. Once graduated, those earning more than £41,000 pay the top 6.1% interest rate while those earning between £21,000 and £41,000 pay on a sliding scale of between 3.1% and 6.1%.
The current headline rate is 4.6%, meaning the interest rate will have increased by a third in one year.
This only affects students who started their course in England and Wales in 2012 or later.
How pre-2012 students are affected
However, post-2012 students are not the only graduates to be hit. If you started university before 1998, your interest rate will also increase.
These students are charged interest at the same rate as the RPI figure, meaning their rate will rise from 1.6% to 3.1% from September.
Meanwhile, those who started university in England and Wales or between 1998 and 2011 - or at any time after 1998 in Scotland and Northern Ireland - pay a rate of 1.25%, which will not change in September.
This interest rate is calculated using the Bank of England base rate (which is currently 0.25%) + 1% or the RPI figure, whichever is lower.
‘Interest on post-2012 loans needs reassessing’
Jake Butler of campaign group Save the Student says: “I was expecting an increase to student loan interest this year, but this is worse than expected. It really demonstrates that the interest on loans under the new system is far too high and should be reassessed.
“But (and this is a big ‘but'!) these figures should be taken with a pinch of salt. Students need to remember that it's highly unlikely they'll pay off their full loan debt before it is wiped 30 years after their graduation and no repayments need to be made until they earn over £21,000 per year after graduation.”
The exact amount students must repay depends on which part of the UK they were living in when they started their course, and whether they attended university in England, Scotland, Wales or Northern Ireland. To find out exactly what you owe, visit the Student Loans Company’s repayment website.
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.