Student loan interest rates soar to 12%: Will current students be affected?

Students and graduates in England will pay up to 12% interest on their student loans from September 2022, according to the Institute for Fiscal Studies (IFS).

For lower-rate earners the interest, which is based on the retail price index (RPI) measure of inflation, will jump from 1.5% to 9%. For graduates earning over £49,130 it will increase from 4.5% to 12%.

The retail price index is based on changes in costs over time, including housing.

The interest rate will fluctuate wildly over the next few years, but from March 2023 it will reduce as it becomes capped at the rate private lenders are offering. This is because student loans are not allowed to rise above interest rates  “prevailing on the market” but there is a six-month lag before this comes into effect.

The IFS is predicting interest rates on student loans will fall to between 7 and 9% in the next few years, and then to a low of around zero between September 2024 and March 2025.

They are predicting little long-term impact on repayments, and are encouraging students not to worry, particularly as “most graduates from the 2012 to 2022 university entry cohorts are unlikely to ever clear their loan balances”. Higher-earning graduates who do clear their debt “will typically only be affected in their late 40s or early 50s” according to the IFS.

Nonetheless, the IFS have called for the government to change the current system. Ben Waltmann, senior research economist at the IFS said: “There is not good economic reason for this. Interest rates on student loans should be low and stable reflecting the government’s own cost of borrowing. The government urgently needs to adjust the way the interest rate cap operates to avoid a significant spike in September.”

The NUS’ Hilary Gyebi-Ababio is worried the high interest rates will deter thousands of students from going to university, calling the figures “brutal”.

The IFS have suggested higher-earning graduates will be most directly affected by the increase, as they are more likely to repay their entire loan. But those earning below the £27,295 threshold are expected to incur an additional £2,300 interest during the six months of higher rates.

Students beginning in 2023 are already facing rule changes, having to repay their loan for up to 40 years, rather than the current 30.