Huge Interest Rate Rise for Student Loans Explained
University graduates from England and Wales, who took out student loans from 2012, are going to be hit by a huge rise in interest rates on their student loans. The Institute for Fiscal Studies (IFS) have calculated that the interest rise will result in an addition cost of £2,200 – £3,000 to graduates in the six months from September 2022 and March 2023.
Student loan interest rates, on loans taken out after 2012, are calculated using the retail price index (RPI), with an extra 3% charge on top. With the recent sky-high rises in inflation, RPI rose by 9% in March 2022. As a consequence the student loan interest rate will increase from 1.5% to 12% for the highest earning graduates from next September. Graduates who earn less than £49,000 a year, will see their interest rates rise from 1.5% to 9%.
The NUS have estimated that the new interest rates will see recent graduates with earnings of over £49,000, incurring £;3,000 interest fees on balances of £50,000 over 6 months. Recent graduates who earn less than £49,000, would incur around £2,300 in interest fees during the same six month period.
A spokesperson for the Welsh Government has confirmed that Welsh and English student loans are repaid using the same loan terms.
Many are worried, including NUS Wales President Becky Ricketts and Joh Anderson from Now Loan, that the increase in interest rates would put off people from less disadvantaged backgrounds from going to university. These concerns are increased, when considered alongside the current cost-of-living crisis many in the UK are facing.
Concerns have also be raised in Wales that the decision to increase interest rates has been made by the Westminster Government, without any input from the devolved Welsh Government, who are responsible for education matters in Wales.
The University Staff Union (UCU), have also raised concerns, with Jo Grady, the general secretary, saying it is not fair to saddle students with additional debt on the basis of volatile markets.
Changes to student loans are due to come into place in March 2023, which means that the new sky-high interest rates will only impact university graduates for a period of six months. From March 2023, student loan interest rates will not be allowed to be higher than loans which can be found in high street lenders (excluding mortgages or & secured loans’). Whilst this is a positive step, and is likely to reduce interest rates, the IFS estimate that graduates will face 7% interest rates from March 2023. Whilst this will mean that graduates will be protected from large increases at a single time, they will still have to pay much higher interest rates than the 1.5% many have been paying.
Like many others the IFS have warned that the rise in interest rates could deter students, especially those from disadvantaged backgrounds, from going to university. The IFS and the NUS have called on the government to take measures to stop wild swings in student loan interest rates.
Research by the IFS has established that the maximum rate of student loan interest will reach 12%, for the period between September 2022 and February 2023. Yet from September 2024, rates could be as low as 0% for six months. The NUS has called on the government to amend the way in which student loan interest in calculated, but they are wary that the government will do this.
With such step rises in interest rates on the horizon, potential students may be considering a gap year to wait for lower interest rates. Whilst there are benefits to taking a gap year, saving money on your student loan may not be one of them. Changes to student loans means that from September 2023, graduates will pay back their loans over 40 years, instead of the current 30 year period. If any money on your student loan isn’t paid back by the end of the time period, your debt is wiped. This means that delaying university for a year could mean you have to pay an extra 10 years worth of student loan repayments.
Furthermore, from September 2023, university graduates will have to start repaying their loans on any earnings over £25,000, compared to the current threshold of £7,000. This means that you may be paying more money each month and paying for a longer period of time. The Government say that they want student finance to be on a more self-sustainable footing, and ensure that more students fully repay their student loans.
These change to repayment thresholds and timescales will only apply to students who begin their undergraduate degrees from September 2023, and will not be backdated to students who started their degrees before this.
University tuition fees for students studying in Wales are currently £9,000 per year, and £9,250 in England. These rates are being frozen until September 2025.