Thursday, 7 July 2022 – 08:07

Student loan interest rate to skyrocket to 12%

According to the Institute for Financial Studies (IFS), interest rates on student loans are set to drastically rise to 12% this Autumn.

Student loan interest rates for higher earners are expected to increase to 12%, up from 4.5%, around September when inflation is set to peak, while poorer earners will pay rates of 9%, up from 1.5%. The income threshold which determines which earning category a loan recipient falls under is currently £27,295. The interest rate for higher-earning student loans is given by the RPI +3%, while those below the threshold pay rates are equal to the RPI.

RPI, or Retail Price Index of inflation is calculated based upon the changing price of an array of goods, including some which are discounted from the more commonly referenced CPI, or Consumer Price Index. Much like CPI, RPI has been sharply increasing over the past few months, reaching 9% in March 2022 compared to 1.5% in March 2021. For most of the past 30 years, RPI has oscillated between 1% and 4%, with the only major deviation occurring during 2009 when the RPI briefly went negative.

As the value of RPI fluctuates, so will the interest rate for student loans, meaning that this increase will only be a temporary affair.

https://twitter.com/TheIFS/status/1514158415601414147?ref_src=twsrc%5Etfw”>April

In 2023 a law will come into effect limiting the loan interest rates and the value will drastically fall again to around 7%. For a brief period, the interest rate is expected to be reduced to 0% to counteract the current increase.

The IFS has said that, while current policy will not result in a meaningful difference in the amount paid overall, it could still deter some students and prospective students from taking out loans or even from going to university if they do not understand the system. To counter this risk, the IFS has proposed an alternative policy for the next 3 years that would limit drastic swings in student loan interest rates, keeping said rates between 4.5% and 8%.

The IFS said:

“The maximum rate will reach an eye-watering level of 12% between September 2022 and February 2023 and a low of around zero between September 2024 and March 2025.”

“There is no good economic reason for this. Interest rates on student loans should be low and stable, reflecting the government’s own cost of borrowing.”

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