Interest rates on post-2012 student loans for graduates in England and Wales will rise to a maximum of 6.3 per cent for those in the highest earning bracket, or 3.3 per cent for those in the lowest earning bracket, based on new figures for inflation.
Interest rates on student loans are updated each September, based on March’s retail price index, which was announced on 18 April as 3.3 per cent. That will mean an increase on current loan interest rates for students and graduates, which range between 3.1 per cent and 6.1 per cent, according to graduates’ earnings.
While students are studying, the 6.3 per cent rate will apply. But for graduates, the rate will range from 3.3 per cent to 6.3 per cent, according to earnings.
The use of positive real interest rates in the post-2012 student loans system has been frequently criticised by some newspapers and will be examined in the government’s review of higher education funding in England.
The change in interest rates does not affect monthly repayments, deducted at 9 per cent of earnings above the threshold of £25,000, as of this month.
And it is only the highest earners, who repay the principal of their loans in full, who will then go on to repay amounts accrued in interest before loans are written off after 30 years.
The Institute for Fiscal Studies said in a 2017 report on student finance: “Reducing the real interest rate reduces the repayments for high-earning graduates and therefore increases the overall cost to government. Low-earning graduates are relatively unaffected by the interest rate charged (at least in terms of their scheduled loan repayments) as they typically do not earn enough to begin to repay the interest accrued on their loans.”
Positive real interest rates mean that the highest-earning graduates “essentially cross-subsidise the education of lower-earning graduates”, the IFS says.
A government spokesman said: “Our decision to raise the minimum repayment threshold for student loans to £25,000 is saving 600,000 graduates up to £360 per year from this month.
“This change in interest rate will make no impact on a borrower’s monthly repayments, and very few people are likely to be affected by the increase. Once the loans are in repayment, only borrowers earning over £45K are charged the maximum rate. This ensures that they make a fair contribution to the system.
“The government’s review of post-18 education and funding is also under way and will look at how students and taxpayers are getting value for money, including the role of interest rates.”