Student record

Confused by rising interest rates on student loans? Here is an explanation

Person holding a large wad of student loan money in bills

Photo: Jason Cairnduff for Reuters

Like many other students or university graduates, you may have seen the recent news about how students in England and Wales could see a massive increase in their loan repayments over the next six months.

According to the last analysis per the Institute for Fiscal Studies, the maximum interest rate charged to current students and graduates earning more than £49,130 ​​will increase from 4.5% to 12% unless further policy changes are made. For low-income earners, interest rates will rise from 1.5% to 9% over the same period.

Creepy ? Confusing? Yes, we know how you feel. Let’s take a look at exactly what these potential changes could mean for you and your bank balance.

First things first: Interest on student loans is capped by law, which means they’re not allowed to exceed “prevailing market” interest rates, in financial jargon. According to the IFS, the latest valid market rate for February is 6%.

However, there is a six-month lag between the interest rate on loans above the ceiling and the interest rate actually reduced by the Ministry of Education. This means that the uncapped rate will apply between September 2022 and February 2023 – hence this scary news.

The IFS also said that from March 2023, the maximum interest rate on student loans should fluctuate between 7 and 9% for a year and a half before dropping to around 0% in September 2024.

nicknamed the interest rate roller coaster, the IFS warned that these interest rates could deter some students from going to university if the government does not intervene. It could also force some graduates to pay off huge amounts of debt that “does not benefit them.”

The key word in all of this is “forecast”. The ISF bases these forecasts on its readings of the Retail Price Index (RPI) from the Office for National Statistics, which measures inflation between March 2021 and March 2022. This is then applied to interest rates for student loans in the 2022/23 academic year.

It is not yet known whether the predictions made by the ISF will come true, because the government could very well decide to intervene first. On April 14, Michelle Donelan, Minister of State for Higher Education, tweeted that she was “aware of some of the claims made in the press about Plan 2 and 3 student loan repayments”.

(Plan 2 student loans, for the record, include anyone with an undergraduate, level 4/5 loan and/or PGCE course commencing September 2012 or later. Plan 3 loans are for third year students only. cycle.)

She added: “The interest rate on student loans has no impact on monthly repayments. These will not increase for students. Repayments are linked to income and not to interest rates.

“Going to college is an incredible opportunity that helps students from all backgrounds progress into the future they choose and so it’s important that we tackle these myths.”

We spoke to Ben Waltmanthe senior research economist who authored the Institute for Fiscal Studies report for his thoughts on Donelan’s tweets and their impact on student loan interest rates.

“The government’s apparent willingness to set the interest rate cap is welcome,” he told VICE. “As I pointed out in my initial briefing, the current policy is flawed, so it’s good to hear the government is looking into this.”

Waltmann added that the minister’s comments that student loan interest rates have no impact on monthly repayments are “not wrong but misleading.”

“Students currently in college and those making repayments who have started college since 2012 will see their loan balance increase further in terms of cash flow in the next academic year,” he said. at VICE.

“It is true that the interest rate on student loans has no impact on monthly repayments for those who are still repaying their loan, he explains. “However, this affects how long those who repay their loans before the end of the repayment period have to make repayments and therefore the total amount these students repay over their lifetime.”

Let’s break it down: Over the next six months, if you’re a student who started college since 2012, you will be see your student loan balance increase in terms of cash flow. However, your monthly repayment will not be affected as it is tied to your salary and do not at interest rates. You won’t repay more during the high inflation period, but you may pay off your debts for longer and the total amount you spend on repayments will be higher.

This does not mean that everyone has to live in fear of possibly paying a huge sum of money. Remember that your debt is written off after 30 years, no matter how much or how little you have repaid.

“It will only matter for repayments from borrowers who repay their loans in full,” Waltmann says reassuringly. “With current policy and forecasts, that appears to be a minority – around a third – of generally high-income borrowers.

“All others’ refunds will be completely unaffected.”

Waltmann added that those currently looking to get into college will be less affected by soaring interest rates. Given recent announcements, however, they might be deterred from applying in the first place.

“Judging by current forecasts, future students will be less affected, partly because the system will change from the 2023 entering cohort, but mainly because their balances will still be quite low at the end of the period. high interest rates.

“The biggest concerns are that prospective students might be put off college by high interest rates or that graduates might spend large sums on repayments that will never benefit them.”

In other words, students who are just starting college in the 2022/23 academic year won’t see much change in their student loan balance. Indeed, the current policy will only apply to a relatively small amount of their debt.

It is not the first time this year that university students have feared for their wallets. In February it was reported that new government proposals to ‘improve’ higher education could mean that pupils who fail GCSEs in maths and English are no longer allowed to take out student loans.

The government has also announced that students who enroll from September 2023 will have to start repaying their loans once they have earned £25,000 instead of £27,000 and will have to make repayments for 40 years , instead of 30 in the current system.

Larissa Kennedy, President of the National Union of Students UKargues that if interest rates on student loans continue to rise, more people from disadvantaged backgrounds will be excluded from higher education.

“The government’s changes to student loans are calculated cruelty,” she told VICE.

“At a time when the cost of living is skyrocketing and real incomes are collapsing, for the most vulnerable, these classist changes could be the difference between getting warm and eating.

“The minister is imposing unimaginable debts on young people for the next 40 years of their lives. It is nothing more than an attack on opportunity.

It seems that all these announcements have one thing in common: students who want to take out a loan must be ready to pay it back very, very A long time.