Student Loan Interest Could Disappear in 2009

Fri, 28 Nov 2008

Students could start earning money on their loans next year as economists warn inflation could drop to below zero per cent.

Interest rates on student loans are linked to the retail prices index (RPI) measure of inflation each March, meaning any drop in inflation is reflected in student loan interest .

Earlier this week official figures revealed RPI fell from 5 per cent in September to 4.2 per cent in October.

A spokesperson for Department for Innovation, Universities and Skills (DIUS), which informs the Student Loan Company of the rates it can charge, said RPI will continue to be used to set rates on student loans, even if it drops to zero.

However, the department seemed less sure about the possibility of negative RPI. "Ministers will be considering options should RPI ever to go negative and will make a decision in due course," the spokesperson added.

Students could technically earn interest on their loans instead of paying interest if RPI drops below zero and the DIUS make no changes to the rules.

A series of economists and the Bank of England have warned negative RPI is a solid possibility for 2009.

Jonathan Loynes, chief European economist at Capital Economics, said: "RPI inflation could fall as far as minus two per cent. Not only is inflation in the UK still dead, but deflation is about to be reborn!"
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