Student loans repayments to rise

Tue, 04 May 2010

The increase last week in the retail prices index (RPI) will have an adverse impact on student loan interest rates, and could leave graduates with a negative return on monthly payments . Close to four million graduates and students will face a large increase in interest charges on their student loans, and the rate surge means loans will continue to rise even when they start making repayments, because the interest will be higher than payments.

Graduates and students are currently paying either no interest or negative rates of interest due to a fall in the RPI to a 50-year low of -0.4 per cent last March. This rate will affect the 400,000 graduates who are repaying loans taken out before 1998, whose interest rate is based on the RPI. From this September they will have to pay 4.4 per cent on their outstanding loans.

For the 3.3 million who have taken out student loans since 1998, the interest rate is either based on the RPI or the Bank of England base rate plus 1 per cent, whichever is lower. In 2010 their loan payments have been based on the RPI and was set at 0 per cent. However, the increase in inflation will mean an increase in their interest rate, despite it now being based on the Bank of England base rate .

With many economists forecasting further increases in the base rate before the end of the year, there may be more pain to come on the student loan rate . However, student loans remain one of the cheapest options for borrowing money in the UK.
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