Interest Rates On Student Loans Set To Rise

Fri, 27 Aug 2010

Graduates across the UK are to start paying interest on their student loans once again after it was confirmed that interest rates will increase to 1.5 per cent for the start of the new academic year.

From September 1, student loan interest will rise from 0 per cent to 1.5 per cent during the year to August 31 2011 for 3.3 million students and graduates, while those who took out loans before 1998 will be hit charged 4.4 per cent.

The new rates replace the 0 per cent and -0.4 per cent rates which have applied on post-1998 loans and pre-1998 loans respectively over the past year.

Loans taken out after 1998 are set at either the Retail Prices Index (RPI) in March or the Bank of England base rate (which is currently 0.5 per cent) plus 1 per cent, depending on which is lower. Interest on pre-1998 student loans is based solely on March's RPI figure (4.4 per cent).

Aaron Porter, president of the National Union of Students, said the increase in student loan interest would add hundreds of pounds to students’ debt "at a time when youth unemployment is at nearly one million".

However, Alana Fitzpatrick, money analyst at MoneySavingExpert.com, said student loans were still the cheapest form of credit available.

"Due to the inflation link, student loans are the cheapest form of borrowing you'll get, there's no real cost as the most interest you'll pay matches the rate of inflation," she said.

"This means if you have an outstanding student loan, as well as more expensive debts from banks or credit cards, it's much cheaper to pay the latter off first."
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