Nearly 4 million graduates and students face a big hike in curiosity prices on their student loans after final week’s sudden leap in inflation.
Student loan charges are linked to the Retail Prices Index (RPI) measure of inflation for March every year. Figures revealed final month present it jumped to an 18-month excessive of 4.4%, which means curiosity prices on student loans are set to surge.
This will come as a shock to graduates and students who’re at the moment paying both no curiosity or damaging charges of curiosity due to a fall within the RPI to a 50-year low of -0.4% final March. For many graduates on low incomes, an increase will imply their loans proceed to develop even after they begin making repayments, because the curiosity will probably be increased than their funds.
Each September the Students Loans Company units rates of interest on its loans, that are depending on when the loan was taken out.
For 400,000 graduates repaying loans taken out earlier than 1998, the rate of interest is totally based mostly on the RPI. They are at the moment having fun with a damaging fee of curiosity of -0.4%, based mostly on the drop in inflation final yr into damaging figures. But from September they’ll begin paying 4.4% on their excellent loans, based mostly on the brand new determine.
The rate of interest for the remaining 3.3 million individuals who have taken out student loans since 1998 is both based mostly on the RPI or the Bank of England base fee plus 1%, relying on which is decrease.
This yr these individuals’s loan funds have been based mostly on the RPI and they’re paying no curiosity, as the speed was set at 0% (the damaging RPI determine for final March ought to have resulted in a -0.4% fee, however the Student Loans Company stated the debtors weren’t entitled to damaging charges). But the inflation rise will result in a rise within the rate of interest they pay, though it should now be based mostly on the Bank of England base fee.
The base fee has been 0.5% for the previous 13 months, and if it stays the identical, students pays a brand new fee of 1.5% curiosity from September. However, many economists are forecasting not less than one enhance within the base fee earlier than the top of the yr. Any base fee enhance earlier than September will result in rises within the student loan fee. The Student Loans Company says it can not touch upon charges till after the overall election and can verify the brand new ones in August.
Students at the moment at college or school can take out loans as much as a most of £10,153 a yr, which means some are graduating with money owed of greater than £30,000.
Provided the bottom fee stays at 0.5%, the rise within the loans fee to 1.5% will add an additional £450 a yr to the debt of students leaving college with the complete loan this summer season.
For students on low incomes this might imply that their debt continues to spiral even after they begin incomes. Repayments are due from the April after students end their course, as soon as they begin incomes over £15,000 a yr. Borrowers repay 9% of their earnings over this quantity out of their wages.
Even if the rate of interest solely rises to 1.5%, graduates on a wage under £20,000 who took out the complete loan will discover their repayments are lower than the curiosity being added to their debt. A graduate incomes £18,000 a yr would obtain £1,500 gross a month, £250 over the reimbursement threshold of £1,250 a month. This means student loan repayments can be £22 a month (9% of £250). However, at a fee of 1.5%, they’d be charged £37.50 a month in curiosity.
The National Union of Students (NUS) says the system for repaying loans is damaged and in want of radical overview. Aaron Porter, NUS president-elect, says: “Clearly the rise is just further proof that the current system is not working. It is a bizarre system in which inflation in one month dictates interest rates over the whole year.
“We are asking for an pressing overview to think about setting charges based mostly on a 12-month cycle. The means that student curiosity is calculated makes it troublesome to have any certainty in any given yr.
“These are really challenging times for those on low incomes, especially when their payments do not even service the interest on their loans and their total debt is growing.”
Despite the anticipated rise, student loans stay one of many least expensive methods to borrow.
Tim Moss, head of loans at comparability web site moneysupermarket.com, says: “Student loans are phenomenally cheap. Even if the rates went up to 5%, they would still be one of the best ways to borrow money in the UK.”
The least expensive comparable loan on the location is an unsecured one with a fee of seven.7%, considerably increased than even the 4.4% fee. Moss says the one option to get near the charges for student loans is to juggle debt utilizing credit playing cards with 0% steadiness transfers.
He provides: “I would be very careful about paying off student loans in a hurry. If down the line your finances are squeezed, it is better to have a student loan than even the cheapest loans or credit cards, especially as banks can be so choosy with their offers.”
Case research
Lucy Philips, 23, has not paid again any of her student loan but, regardless of graduating in 2008. The Exeter classics graduate is at the moment working as a faculty studying mentor and isn’t incomes sufficient to start out making repayments.
“I hope one day to pay off my loan, but at the moment it seems a long way away,” she says. “The rise in the student loan rate means it will be even longer before I clear the debt. I owe around £13,000, which mainly went on accommodation.”
Philips feels fortunate she started her research simply earlier than top-up charges had been launched: “I paid £1,175 a year in tuition fees, but the people in the year below paid £3,000, so owe a lot more than me. At the moment there are not many graduate jobs around, so many people’s debts are just growing. A lot of those who graduated at the same time as me are still struggling to find well-paid work. I am earning £11,000 a year so have not even started to pay off my loan.”