Student loan repayment interest to reach 6.3%

Written by News

This week, the Government announced that students in England, Wales and Northern Ireland will face up to 6.3% interest rates on their student loans due to an increase in the Retail Price Index’s (RPI) measure of inflation.

This rise follows a more significant rise in September 2017 of student loan interest rates from 4.6% to 6.1%.

Economists have criticised the Government for using RPI to calculate student loan repayments, as it typically measures the rise of inflation higher than other measures, and lost its status as an official national statistic in 2013 because of this inaccuracy.

The Office for National Statistics spoke out advising against the use of RPI, stating it has a ‘flawed’ measure of inflation. Although the Government have seemingly heeded this advice by switching to using the Consumer Price Index to measure inflation for other forms of interest, such as pensions and benefits, they continue to use RPI when calculating loan repayments.

The rise in interest will take effect from September for students under the 2012 fee scheme; the changes which saw university tuition fees rise to £9,000 per year. This comes after an announcement earlier this month that the income threshold graduates must reach to begin repaying their loan, is to be raised from £21,000 to £25,000.

A spokesperson from the Department for Education said this rise will save “600,000 graduates up to £360 a year”.

[pullquote]This change “continues to represent a poor deal for students, their families and the taxpayer” – Amatey Doku, NUS Vice President[/pullquote]

However, with over 1.5 million students currently graduating from undergraduate degrees each year, the rise in interest will disadvantage many students, increasing the overall debt some graduates repay in their lifetimes.

The BBC’s Education Editor, Branwen Jeffreys, commented that “it is the middle earners who are most likely to feel the long-term impact” of increased interest rates, because “if your earnings are low as a graduate, a larger part of your total loan is likely to be written off by the government” at the end of the 30 year repayment period, whereas “if you are a higher earner you repay more quickly”.

Student loan interest is not fixed. As of September, graduates will be repaying between 3.3% and 6.3%, depending on their income post-graduation. A minority of graduates – roughly 25% – currently repay their full loan.

However, under the new interest system, middle earners will now earn enough to repay a considerable amount of their loans over the 30 year period, as all earning over £45,000 will now be charged the maximum interest rate on loans.

NUS Vice President, Amatey Doku, criticised the increase in interest for adding to the already “huge psychological burden” that debt places on graduates. Doku commented that this adaption of debt repayment “continues to represent a poor deal for students, their families and the taxpayer”.

Last modified: 2nd May 2018

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