Student loan interest rates to rise again in September
The interest charged on student loans is set to rise substantially this September. But is this something really worth panicking about?
The government has just released its RPI rate for the month of March, which is used to set the interest rates of student loans for the following academic year (from this September).
Student loan interest rates are tied to March's figure for inflation, so when RPI (Retail Price Index) goes up or down, so does the rate of interest charged on your student loan for the following academic year.
This year's RPI has been released as 3.1% (up from 1.6% last March, and 0.9% the year before that!). As a result, students could see the interest on their loans rise from 4.6% to a whopping 6.1%.
How will this affect me?
That really depends on what stage you're at in your education, and which student loan you took out.
Here's what you'll pay on you're student loan from September 2017:
If you started uni after 2012 (inc. current students!)
Not everyone realises this, but you start accumulating interest on your loan while you're still studying. During your degree, the interest on your loan is calculated at a rate of RPI + 3%, then once you start working, it's calculated at a rate of RPI plus between 0-3%, depending on how much you're earning.
Last year, RPI was set at 1.6%, meaning students are currently accumulating interest at a rate of up to 4.6% on their loans (up from 3.9% the previous year), but this will increase to 6.1% in September.
To summarise:
- The interest rate you currently pay is up to 4.6%
- In September it will rise to up to 6.1%
- The interest rate is calculated using RPI + up to 3% depending on your earnings* (but whilst you're still studying, it's charged at a solid RPI +3%)
- From September, the interest charged on your loan will increase because RPI will increase from 1.6% to 3.1%. Therefore, current students will be accruing 6.1% on their loans whilst studying rather than 4.6% due to this RPI increase
- However, you don’t start repaying your loan until you're earning more than £21,000 per year (but note that this threshold has been frozen until 2021 – read more here)
- Unless you start off with a graduate salary of higher than £30,000, it's unlikely you'll pay off your full loan and interest before it's wiped after 30 years anyway.
*explained in full here.
If you started uni between 1998-2011
Despite the rise in RPI, your student loan interest will not increase. You're also likely to pay back less next year if your earnings stay the same.
To summarise:
- The interest rate you currently pay is 1.25%
- In September it will stay at 1.25%
- This is because it's based on whichever rate is lowest out of RPI OR the Bank of England base rate + 1%.
- The Bank of England base rate is currently 0.25% (so when you add the 1% it makes 1.25%)
- Those who studied at this time start paying back their student loan once they make over £17,775 per year (up from £17,335 last year).
Should I be panicking?
Whilst the rise in RPI has had a pretty shocking effect on the interest charged on student loans, in reality this isn't something to panic about right now.
For a start, this will only be the rate for one year, and in reality we could see interest rates drop again next year (as they did back in 2015).
So whilst you should be unhappy about this increase, don't let it keep you up at night!
Our Finance Expert, Jake Butler says:
We were expecting an increase to student loan interest this year, but this is worse than expected. It really demonstrates that the interest on loans under the new system is far too high and should be reassessed.
But (and this is a big 'but'!) students need to remember that it's highly unlikely they'll pay off their full loan debt before it's wiped 30 years after their graduation.
So in reality, this increase is just adding to the massive amounts of accumulative student loan debt that the government will never see.
Find out if you'll pay off your loan before it's wiped after 30 years using our student loan repayment calculator.
Additional sources: ONS RPI rates and SLC interest info.
