Students Face Rise In Loan Interest Rates

Fri, 23 Apr 2010

Graduates and students may face higher interest repayments on their student loans following a rise in inflation.

The interest rate payable on student loans is set by the Student Loans Company at the start of September, based on the Retail Prices Index (RPI) level of inflation in March.

RPI rose to a larger-than-expected 4.4 per cent last month in March - the highest level since autumn 2008 - and as a result nearly three million UK students and graduates are likely to see an increase in student loan interest .

Interest rates for student loans differ depending on when the loans were taken out.

Interest on loans taken out before 1998 is based on the level of RPI in March, while the rate on post-1998 loans is set at either RPI in March or the Bank of England base rate (0.5 per cent) plus 1 per cent, depending on which measure is lower.

As a result of the increase in inflation, gradates with pre-1998 loans who are currently paying a rate of minus 0.4 per cent (i.e. earning interest on their loans) can expect to see their loan rate rise to 4.4 per cent in September.

Students with loans taken out after 1998 are currently paying 0 per cent interest as the Student Loan Company ruled that negative interest rates would not apply to them. However, if the base rate remains at 0.5 per cent, the interest payable on their loans will rise to 1.5 per cent.

The current student loan rates were set in March 2009 in response to the economic recession, which caused RPI to turn negative for the first time in 50 years.
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