Students have been warned of a ‘roller coaster ride’ on interest rates: IFS says a potential rate of 12% from the fall could add £3,000 of extra debt in just six month
- Interest rates on student loans set to rise from 4.5% to 12% for high earners
- Rising inflation means interest rates for low earners rise from 1.5% to 9%
- Some graduates will incur additional interest of £3,000 over 6 months from September
- IFS says ‘interest rate roller coaster awaits us’
Students and graduates in England and Wales are expected to pay 12% interest on their loans from the autumn, in what is described as a “roller coaster ride” by the Institute for Fiscal Studies.
Interest rates on student loans after 2012 are expected to rise from 4.5% to 12% for current students and high earners.
Meanwhile, the rate is expected to climb from 1.5% to 9% for low earners.
It comes after the retail price index inflation measure for March, on which the current interest rate system is based, was found to be 9%. Low-income earners are charged interest at the March RPI rate, while high-income earners and current students are charged RPI plus 3%.
High earners could face up to three times the usual amount of interest on their student loans from September as interest rates soar to 12%
English and Welsh graduates who took out a student loan from 2012 have been told to prepare for much higher student loan interest rates, which come into effect from September 2022.
It would be the highest rate seen since tuition fees for university students in England were raised to £9,000 a year from 2012.
While the IFS said a rollercoaster of interest rates awaits the most recent graduates, they hope the long-term impact on repayments won’t be too big.
Today’s RPI inflation means the maximum interest rate, which is charged to current students and graduates earning over £49,130, would rise from its current level of 4.5% to 12% from September .
This means that for a typical loan balance of £50,000, a high-income graduate would incur £3,000 in interest over six months, three times more than recent graduates would typically pay off in that time.
The maximum interest rate on student loans is expected to fall to between 7 and 9% in March 2023 – when a cap on interest takes effect – before falling to the expected 0% in September 2024, before rising again to 5% d ‘here March 2025.
The IFS said these “wild swings” in interest rates stem from the combination of high inflation and the introduction of the interest rate cap, which takes six months to take effect.
Although fluctuating interest rates affect all student loans, they can have a significant impact on high-income graduates who expect to repay their loans.
For many, this short spike, and other fluctuations expected to follow over the next couple of years, won’t make a big difference overall to how much they pay back.
The IFS said the main risk is that it could deter potential students who do not understand the complex system, as well as high-income graduates who may be tempted to use their savings to pay off their remaining loan.
Tom Allingham of Save the Student said: ‘At a time when students and graduates are facing huge increases in the cost of living, today’s RPI announcement is another blow.
High earners with student loans from 2012 will be hardest hit by soaring inflation until the price cap comes into effect in March 2023
“If implemented, a maximum interest rate of 12% would massively exceed the previous Plan 2 high of 6.6% and represent an increase of almost three times the current maximum rate.
“For low-income people whose loans bear interest at the RPI rate only, using the March figure would mean that in September their interest rate will be six times higher than it is now.
“It should be noted that because graduates only repay a percentage of their earnings above a threshold, any change in the interest rate will not affect how much people repay each month.
“However, higher interest rates mean larger overall debts, meaning the loan takes longer to repay for those who might otherwise have done so sooner.”
“Another important factor is that when the government determines that the interest rate on Plan 2 student loans is higher than comparable unsecured commercial loans, it can and will cap it at what they call the rate of current market.
“They’ve done this for the past year, but the decision affecting this new RPI rate won’t be made until August, leaving months of uncertainty in between.”
How is my student loan interest rate calculated?
If you started university from 2012 to today:
• The interest rate you are currently earning can be as high as 4.5%. In September, it should rise to 12%.
• From September 2022, current students and new entrants will be charged the maximum interest rate, to be announced in August, during their stay at the university.
• For graduates, interest rates are calculated using RPI +3 percent. Those earning £49,130 or more could be charged 12% interest while those paid less than £27,296 could be charged 9% interest, with anyone in between on a sliding scale.
• You don’t start paying back your loan until April after you graduate and earn over £27,295 a year
• If you don’t start working with a graduate salary of over £28,000, you are unlikely to repay your loan in full before it is canceled after 30 years.
If you entered university between 1998 and 2011, or if you are Scottish or Northern Irish:
• The interest rate you are currently being charged is 1.5% and will likely remain at 1.5%.
• This is because it is based on the lower of the RPI OR the Bank of England base rate, which is currently 0.5% plus 1 percent
• These student loans are repaid once graduates earn over £20,195 a year or £25,375 for Scottish students.
If you started university before 1998:
• The current interest rate is 1.5% and could increase to 9% from September.
• It is based only on the RPI (or prevailing market rate) figure for March
• Refunds are made by graduates earning more than £36,284 a year
Tom concluded: “Disappointingly, the government also failed to answer some of our key questions which would have helped us inform young borrowers of the exact possible outcomes.
“We strongly encourage them to issue clear guidelines as soon as possible to reassure students and graduates that their loans will not come with record interest rates.”
For students with loans after 2012, outstanding balances are written off after 30 years, but students beginning degrees from 2023 will be required to repay their loans for up to 40 years.