Student loan interest up 33pc with inflation

Rising prices index means students need to earn £48,000 a year to pay off capital, says Sam Brodbeck

Students are facing a 33pc rise in the interest rates they accrue on their loans as a result of rising inflation. Each year, the official March inflation figures are used to set the student loan rate taking effect from the following September. Today’s announcement that inflation, as measured by the retail prices index (RPI), was at 3.1pc in March means some students will be charged as much as 6.1pc on their loans.

Under rules introduced in 2012, annual interest of RPI plus 3pc is charged on student loans as they are built up while studying.

Once you graduate and begin working, the interest rate sits between RPI and RPI plus 3pc, determined by a sliding scale depending on your earnings.

As a result, those earning £21,000 or less will see their loans increase by 3.1pc, while loans held by those earning £41,000 or more will grow by 6.1pc.

Based on inflation in March last year, interest is currently accruing at up to 4.6pc, meaning September’s rise will be equivalent to a 33pc increase.

You begin paying off your student loan when you earn £21,000 a year, paying 9pc of earnings above that threshold.

The latest increase to the interest rate means someone with a £40,000 debt would have to be paid just over £48,000 a year before they earned enough to pay off the loan rather than simply service the interest. Under the current rate, the same person would have had to earn £43,000.

The rate increase applies to people who started university after 2012.

This group of students was the first to pay fees of up to £9,000 a year and many are expected never to pay off the full amount. Loans expire after 30 years.

If you took out a student loan between 1998-2011, the system is different. The interest rate on these loans is to stay at 1.25pc. This is because for these loans the interest rate used is the lower of RPI or the Bank of England base rate plus 1pc.

For these students, repayments will be taken automatically once they earn over £17,775 a year, up from £17,335 currently.

Jack Butler, of Save the Student, a money advice website for students, said the increase was “worse than expected”. He said: “It demonstrates that the interest on loans under the new system is far too high and should be reassessed.

“Students need to remember that it’s highly unlikely they’ll pay off their full loan debt before it’s wiped 30 years after their graduation and no repayments need to be made until they earn more than £21,000 per year.

“So, in reality, this increase is just adding to the massive amounts of accumulative student loan debt that the government will never see.”

A Department for Education spokesperson said: “Our student funding system is sustainable and fair, with affordable loan rates based on income. This means that no individual will see their repayments rise as a result of interest rates increasing.

“Rates are set each year in September and are not confirmed before efore then. then.”

Students earning more than £41,000 will pay 6.1pc in interest on their loans