Student loan interest rates set to skyrocket – what the changes mean for your repayments

Graduates repaying their student loans are set to see interest rates soar this year, with the Institute for Fiscal Studies warning that students who took out loans after 2012 are set for a “roller coaster ride”.

Based on current retail price index (RPI) inflation rates, the changes will see the maximum interest rate on loans rise from 4.5% to a “mouth-watering” 12% for six months for highest earners – those earning £49,130 ​​or more – while interest rates for low earners will rise from 1.5% to 9%, the IFS said.

This means that a high-income recent graduate with a typical loan balance of £50,000 would incur £3,000 in interest over six months, an amount higher than a graduate earning three times the median salary of recent graduates would typically pay. .

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However, the spike in interest rates is only temporary, the IFS said. The maximum student loan rate is expected to fall to around 7% in March 2023, fluctuating between 7% and 9% for a year and a half, before falling back to around 0% by September 24 and rising to around 5% in March 2025.

“These wild swings in interest rates will come from the combination of high inflation and an interest rate cap that takes six months to come into effect,” the IFS explained.

The IFS said that without the interest rate cap, maximum rates would be 12% in the 2022/23 academic year, rising to around 13% in 2023/24. According to the IFS, this “roller coaster of interest rates” should cause problems, because the cap on interest rates disadvantages students with decreasing debt balances. It could also deter students from going to college or push graduates to repay their loans when there would be no financial benefit to them.

Interest rate increases are linked to RPI and a rise in the cost of living. For borrowers starting with the 2012 college-entry cohort, student loan interest is normally tied to the RPI. The rate is usually charged somewhere between the RPI inflation rate and the RPI inflation rate plus 3%.

But there is a lag between the RPI inflation rate and the interest rates on student loans, which IFS calculates means that the current high inflation rates will translate into higher rates of inflation. interest on student loans for 2022/23.

“This high value implies a meteoric rise in interest rates on student loans between 9% and 12%,” the IFS said. “That’s not only far more than average mortgage rates, but also more than many types of unsecured credit. Student borrowers might legitimately wonder why the government is charging them higher interest rates than those offered by private lenders.”

Student loan interest rates are not expected to exceed market interest rates, but lags between when the market interest rate is measured and DfE action mean that between September 2022 and February 2023, students will pay uncapped rates.

The situation is likely to disadvantage the highest paid graduates. Borrowers whose debt decreases over time will be charged more than those whose debt increases. The IFS said this would lead to an “unfortunate redistribution” among graduates.

Ben Waltmann, senior research economist at IFS, said: “Unless the government changes the way interest on student loans is determined, there will be wild swings in the interest rate over the next three coming years. The maximum rate will reach a staggering 12% between September 2022 and February 2023 and a minimum of around zero between September 2024 and March 2025.”

He added: “There is no good economic reason for this. Interest rates on student loans should be low and stable, reflecting the government’s cost of borrowing. The government must urgently adjust the operation of the interest rate ceiling to avoid a major spike in September.

University and College Union general secretary Jo Grady said: ‘It simply cannot be fair to burden students with tens of thousands of pounds of debt and then subject them to the vagaries of market volatility. and soaring interest rates. Today’s news will leave those already repaying student loans bracing themselves for increased debt payments during a cost of living crisis and force others to wonder if a college education is really worth it. At all levels, it is a political disaster.

A Department for Education spokesperson said: “Unlike commercial loans, student loans are protected in a number of ways. Monthly student loan repayments are tied to income, not interest rates or amounts borrowed, and borrowers with incomes below the relevant repayment threshold do not repay at all.

The spokesperson added: “The IFS report clearly indicates that changes in interest rates have a limited long-term impact on repayments, and the Office of Budget Responsibility projects that the RPI will be below 3% in 2024. Either way, the government has cut interest rates for new borrowers so that from 2023/24 graduates never have to repay more than they borrowed in real terms.

It comes after the government announced in February this year that students starting university courses in 2023/24 will have to start paying back their loans once they earn over £25,000. The threshold for new students starting courses will be set at £25,000 until 2026-27, while the current salary threshold for student loan repayment is £27,295.

The repayment term for student loans will also be extended to 40 years for students starting their studies in September 2023.

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