14 April 2016

Student loan interest rates set to rise

This September, the interest charged on your student debt is set to rise 75% – but don’t panic! This sounds a lot worse than it is.
panic shockCredit: Scott Ellis – Flickr

Student loan interest rates are set so that they rise and fall along with RPI (retail price index), which basically means that as the cost of living gradually increases, interest rates rise to reflect this.

Whatever the RPI is in March of each year – when the government sets the yearly budget – this is then used to calculate how much interest will be paid on student loans for that year.

In 2015 when (now Ex-) Chancellor George set the budget RPI was just 0.9%, but this year it’s climbed to 1.6%.

As many of the newspapers have highlighted, this sees a potential 75% jump in interest to be paid on student loans this year, but in reality this figure sounds worse than it really is.

Use our student loan repayment calculator to find out how much interest you’re likely to be paying on your student loan.

The situation

Student loanAlthough a 75% increase sounds bad, this will mostly affect high earners (and maybe they can afford to part with a bit more of their hard earned, right?).

The student loan repayment situation for 2016 is as follows…

For those students who were at uni between 1998-2011:

  • The interest rate you currently pay is 0.9%, based on the RPI rate in 2015
  • However, in September the interest on these loans will not be the new RPI of 1.6%, but will be 1.25% because you’re required to pay whichever rate is lowest out of RPI or the Bank of England base rate + 1%. The Bank of England have announced a surprise post-Brexit cut in interest from 0.5% to 0.25%, which has in turn affected the loans
  • This means the interest on these loans will be 1.25% in September (not 1.5% as it was previously thought)
  • Although this is an increase, this is actually 0.25% lower than the interest rate you were paying on these loans between 2011 and 2015
  • Those who studied at this time start paying back their student loan once they make over £17,495 per year, but this will also rise to £17,775 in April 2017.

For those students who started uni any time from 2012 onwards:

  • The current interest rate is set at RPI + 3% – 3.9% depending on earnings
  • This interest rate will rise to a max of 4.6% in September
  • Currently, you accrue interest of 3% + RPI on your student loan each year that you’re still studying (so 3.9% at the moment as RPI is 0.9%), then between 0-3% + RPI afterwards depending on how much money you’re earning
  • From September, the interest charged on your loan will increase because RPI will increase from 0.9% to 1.6%. Therefore, current students will be accruing 4.6% on their loans whilst studying rather than 3.9% due to this RPI increase
  • Although these rates are higher, remember that those students who started their studies after 2012 don’t start repaying their loans until they’re earning more than £21,000 per year (but note that this £21,000 threshold has been frozen until 2021 instead of gradually increasing in line with rising average earnings – read more here)
  • Unless you start off with a graduate salary of higher than £35,000, it’s unlikely you’ll pay off your loan and interest accrued before it’s wiped after 30 years anyway.

UPDATE: This article has been amended to reflect changes to the BOE base rate.

If you want to understand a bit more about exactly what you are/will be paying in student loans, check out our student loan repayment calculator and read our Big Fat Guide to Student Finance to arm yourself with the facts!

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