August 21, 2020

The student loan interest rate is rising – what does it mean for you? | Student finance

The student loan interest rate is rising – what does it mean for you? | Student finance

From September, students in England and Wales will face higher interest rates on their student loans. The maximum interest you can be charged is going up from 5.4% to 5.6%. Here’s what that means for students and graduates.

Does the rise affect me?

The rate rise affects anyone with a Plan 2 student loan. You’re on Plan 2 if you’re an English or Welsh student who started an undergraduate course in the UK after September 2012. That includes anyone studying or starting university this year, or who has graduated or left a course in the past few years. Some EU students have Plan 2 loans, too. It’s worth checking if you’re not sure.

Why are rates going up?

Plan 2 interest is reviewed every year. It’s based on the Retail Prices Index (RPI), which measures the cost of living in the UK. Whatever RPI is in March becomes the loan’s interest rate, plus up to 3% on top. This year’s RPI is 2.6%, up from 2.4% in the previous March. Your loan interest is mirroring this rise, making the top rate 5.6% from September (RPI + 3%).

It’s not a huge increase. The bigger issue is that rates are going up for students when other borrowers are getting more support. Plan 2 interest also dwarfs the 1.1% charged on Plan 1 loans (Northern Irish and Scottish students, plus pre-2012 loans).

What does this mean for my loan balance?

Your balance will accumulate a bit more interest. For example, a third year student who owes £30,000 will have £1,680 added to their debt this year. If interest had stayed at 5.4%, it would have been £1,620.

Your outstanding balance may be different from this. And your interest rate will be on a sliding scale depending if you’re studying or have left your course. Either way, the rate rise won’t make a huge difference to your balance. And it makes even less difference to how much the loan costs you.

Am I worse off?

Students won’t be out of pocket because of higher rates. You don’t start repayments until you’ve left your course and are earning above an income threshold. You then repay 9% of anything you earn above the threshold.

For Plan 2 students, the threshold is £26,575 (£27,295 from April 2021). If you earn less than this, repayments stop until you’re back over the line. Interest rates have no impact on monthly repayments. It’s how much you earn after your course that dictates how much and when you repay – this hasn’t changed.

Should I repay my loan early?

Don’t be pressured into extra or early payments. For some higher earners, paying the loan back early could save money in the long run. But most students will never earn enough to repay the full amount. Then, after 30 years, any remaining balance is wiped out and the loan cancelled for free.

The government estimates two out of three loans will be written off (and this is a pre-pandemic prediction). If you won’t clear the whole balance, paying extra is likely to be a waste.

Should I reconsider going to university?

The interest rate has no bearing on how much the loan costs you, so don’t let it put you off going to university or college.

What if Covid-19 affects my job chances?

If the worst happens, student loan repayments will pause if you lose a job or can’t find work (unlike with bank or private loans). You won’t lose out by having a student loan. While it’s natural to worry about unknowns, things might not be as bad as you fear. And there are ways to improve your job chances.

Can I get a lower interest rate?

There are no discounts. Nationality and residence rules determine if you get a Plan 1 or Plan 2 loan, so you can’t shop around, either. Plan 2 interest is applied in bands according to your circumstances, so check your account is up to date so you only pay what you owe. The rate defaults to the maximum if you don’t keep in touch with the Student Loans Company, so don’t disappear or stop replying.

Finally, keep in mind that RPI can fall, too. Student loan interest in 2018-19 was 6.3%, so it can and does go both ways.

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