According to research, English and Welsh graduates who took out student loans after 2012 should expect a “rollercoaster ride” in interest rates. According to the Institute for Fiscal Studies (IFS), rates for the highest-earning graduates might reach 12%. This means that over the course of six months, a high-earning new graduate with an average loan balance of £50,000 would pay £3,000 in interest. Why will certain graduates face higher student loan interest rates?
The interest rate charged is between the rate of RPI inflation and the rate of RPI inflation plus 3%, depending on a graduate’s wages.
However, there is a lengthy lag between measuring RPI inflation and seeing it reflected in student loan interest rates.
Because of current RPI inflation rates, the maximum interest rate on loans – paid by people earning £49,130 or more – will jump from 4.5 percent to a “eye-watering” 12 percent for the next six months, according to the IFS.
According to the IFS analysis, “it is not only far more than average mortgage rates, but also far more than several types of unsecured credit.” “Borrowers of student loans may justifiably wonder why the government charges them greater interest rates than commercial lenders.”
How much longer will this go on?
According to the IFS, the maximum student loan rate will drop to roughly 7% in March 2023, after hovering between 7% and 9% for a year and a half. “It is then anticipated to dip to roughly 0% in September 2024, before increasing to around 5% in March 2025,” the report added. “These large swings in interest rates will be caused by a combination of high inflation and an interest rate cap that takes six months to implement,” they noted. They claim that without the rate cap, maximum rates in the 2022/23 academic year would be over 12%, rising to around 13% in 2023/24. The repayment arrangements for students in England who take out a loan will alter starting next year. While the interest rate will be lowered to match the RPI, new graduates will be required to return their loans at a lower earnings level of £25,000 per year, as opposed to the current £27,295. The repayment period will be lengthened from 30 to 40 years.
What does this imply?
The “interest rate rollercoaster,” according to the IFS, would pose problems because the interest rate cap disadvantaged students with declining loan amounts. Higher-paid graduates will be the greatest hurt because they are more likely to repay their loan before it is forgiven after 30 years. It might also discourage students from attending university or force graduates to repay loans even if doing so would not benefit them financially. The interest rate, according to the National Union of Students (NUS), is “brutal.”
“Students aren’t cash cows,” said Hillary Gyebi-Ababio, NUS vice-president for higher education. “We can’t keep bearing the brunt of this Government’s regressive actions that have left millions vulnerable to uncertainty and hardship.” When do student loans become forgiven?
Students in England and Wales who took out a Plan 1 loan in the academic year 2005-2006 or before will have their loan forgiven when they reach the age of 65. If the loan was taken out in the academic year 2006-2007 or later, the loan will be forgiven 25 years from the first due date in April.
For individuals on Plan 2, the loan is forgiven 30 years after the original due date of April.
Those on Plan 4 who took out the loan in the academic year 2006-2007 or earlier will have their loan forgiven when they reach the age of 65, or 30 years after the due date, whichever comes first. The debt is written off 30 years after the April it was first due to repay for people who took out the loan in the academic year 2007-2008 or later.
More information on this, as well as loans for postgraduate students, may be found here.