The huge interest rate rise for student loans explained
The ‘brutal’ interest rate rise could deter those from less well-off backgrounds from going to university, warns the National Union of Students. Education editor Abbie Wightwick reports
GRADUATES from Wales and England are about to be hit by a “brutal” 12% rise in interest rates on their student loans.
The rise applies to loans taken out since 2012 and will cost graduates an extra £2,200 to £3,000 between September this year and March 2023 depending on how much they earn, the Institute for Fiscal Studies calculated.
Interest rates on student loans taken out since 2012 are based on the retail price index plus 3%, with the 9% rise in RPI in March meaning it will soar from the current interest rate of 1.5% to 12% for the highestearning graduates next September, the IFS said. Interest rates for graduates earning less than £49,000 a year are set to rise from 1.5 per cent to 9 per cent.
An NUS spokesman estimated recent graduates on more than £49,000 would pay £3,000 in interest on a balance of £50,000 over six months from September 2022 to March 2023. Recent graduates earning less than £49,000 will see interest rates on their student loans increase from the current 1.5% to 9%, incurring about £2,300 interest in the same period.
Changes to repaying student loans are coming in from 2023-24.
A Welsh Government spokesman said: “I can confirm that the situation is exactly the same for Welsh borrowers (of student loans). Welsh and English borrowers are on the same loan terms.”
NUS Wales President Becky Ricketts warned the rise would discourage young people from less well-off backgrounds from going to university.
“These figures are brutal. By increasing the maximum interest rate on student loans to 12% the UK Government is deterring the most disadvantaged students from going to university. This will also cause great uncertainty for the millions of graduates who are already repaying their loans in the midst of a cost-ofliving crisis.
“This is another example of a decision being made at Westminster that the Welsh Government can do nothing about. Education is supposed to be devolved to Wales, but so many decisions that impact the lives of students and graduates still sit with ministers in England.
“Wales has a history of progressive education policy, but the Welsh Government needs to seek the powers to do things radically differently to show Westminster the way and implement a system that puts people above profit and kicks marketisation out of education for good.”
Jo Grady, general secretary of university staff union the UCU, said it was not right to saddle students with tens of thousands of pounds’ worth of debt and then “subject them to the whims of volatile markets and rocketing interest rates”.
■ How interest on student loans works
Student loan interest rates are linked to graduates’ pay. Graduates on £49,000 or more are charged interest at RPI plus 3%. Those earning £27,295 or less are charged RPI, although they do not make repayments until they earn above £27,295.
An NUS spokesman said recent graduates on more than £49,000 would pay £3,000 in interest on a balance of £50,000 over six months from September 2022 to March 2023. Recent graduates earning less than £49,000 will see interest rates on their student loans increase from the current 1.5% to 9%, incurring about £2,300 interest in the same period.
■ How the situation will change in March 2023
The latest vast interest rate rise will only affect graduates for six months because a new statutory limit takes effect from March 2023. Under the new law interest charged on student loans cannot be higher than on unsecured commercial loans that can be taken out on the high street.
The Institute of Fiscal Studies said that on current estimates interest is likely to fall back to about 7% in March 2023. Fluctuations in the years ahead mean that the latest interest rate hike may not make a large overall difference in how much graduates pay in total over time for their loans, some commentators believe.
But the IFS warned the huge rise now could deter potential students who don’t understand the complicated and uncertain system of student loans. The NUS and the IFS said the government could alter student loans to stop such “wild swings” in interest rates.
The IFS said in a statement: “The maximum rate will reach an eyewatering level of 12% between September 2022 and February 2023 and a low of around zero between September 2024 and March 2025.”
An NUS spokesman said: “The government can change this. It is within their power to change the way interest is calculated for student loans, but it is unlikely they will.
“The government has pushed financial difficulties onto young people.”
Why it might not be wise to take a gap year in 2022-23
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From the academic year 2023-24 university graduates will pay back their student loans over 40 years instead of 30. At the moment any outstanding loan is wiped out after 30 years. The extension means graduates will pay thousands more and some will still be paying them off in their sixties, commentators have warned.
At the same time, from 2023-24, graduates will start paying back their student loans once they are earning £25,000 instead of the current £27,000.
The UK Government has said student finance will be “put on a more sustainable footing” and wants to ensure more students pay their loans in full.
The new changes won’t be backdated to former graduates, or students who began their undergraduate degrees before September 2023.
Yearly tuition fees in Wales are £9,000. In England they are £9,250 and are to be frozen at that rate until September 2025.