Your Student Loan interest is set to drop to 5.4% but here’s what it ACTUALLY means
The government's announcement of a March RPI rate of 2.6% means students will, at last, see a decrease in the interest on their loans! Sounds good right? But does it really matter?
Hang on, what even is RPI?
RPI, which stands for the Retail Price Index, is a measure of consumer inflation, or how much prices on goods (ie. that gorge jumpsuit you just ordered off ASOS) and services (ie. tickets for the train ride home at the end of term) go up to you and me! It's published by the Office for National Statistics on a monthly basis.
Why would RPI affect your Student Loan?
Well, the interest rate charged on student loans is updated each September based on March's rate of RPI from the same year.
RPI ballooned from 1.6% in 2016 to 3.3% in 2018. However, it's now dropped to 2.4% meaning students will accumulate less interest on their loans, which means less cash for students to pay back. In theory.
But is it really as straightforward as that?
How will the new interest rate affect your Student Loan repayments?
The new interest rates will affect you differently depending on where in the UK you're from and when you started your degree. Don't worry – we've broken it down for you!
You're from England or Wales and went to uni in 2012 or later
The interest rate you currently accrue is up to 6.3%. In September it will drop to up to 5.4%.
From September 2019, current students and new starters will be charged the maximum interest of 5.4% while at university.
If you've already graduated, the interest rate is calculated using RPI plus up to 3% depending on your earnings. Those earning £46,305 or more will be charged the full interest amount of 5.4% and those earning £25,725 or less will be on 2.4% interest, with anyone in between on a sliding scale.
You don’t start repaying your loan until the April after your graduation and you're earning more than £25,750 per year (£25,000 last year).
Unless you start off with a graduate salary of higher than £28,000, it's unlikely you'll pay off your full loan and interest before it's wiped after 30 years anyway (calculated using Save the Student's loan repayment calculator)!
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You're from Scotland or Northern Ireland and started uni between 1998 - 2011, or 2012 and later
The interest rate you're currently charged is 1.75%. In September it will stay at 1.75%.
This is because it's based on whichever rate is lowest out of RPI OR the Bank of England base rate plus 1%. The Bank of England base rate is currently 0.75%, so when you add the 1% this comes to 1.75%.
Those who studied during these periods start paying back their Student Loan once they make over £18,935 per year (up from £18,330 last year).
If you started uni before 1998
The interest rate you're currently charged is 3.3%. In September it will decrease to 2.4%
This is because it is based on the March RPI figure alone. The amount you must earn to repay will increase to £30,737.
Does the interest rate on student loans matter?
Here's what our Student Finance Expert, Jake Butler, had to say about the interest rate decrease:
Whilst we'll see a dip in the interest on student and graduate loans it's still worth remembering that it's still way higher than what we saw just a few years ago.
This change will do very little to make students feel at ease and once again highlights a broken student loan system, one that seems to be constantly "under review".
Having said that, students should be aware that the interest changes make very little difference to what they'll likely pay back.
The majority will never pay back their whole loan before it's wiped after 30 years so any small fluctuations in interest just add or take away from a pile of money that'll never be paid back anyway.
It's more of a psychological issue than a monetary one.
Still a little confused about your Student Loan? Make sure you check out our Big Fat Guide to Student Finance.
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