Graduates to be hit with ‘brutal’ student loan interest rates of up to 12% | Students

Interest rates on student loans are set to soar to as high as 12%, costing higher-earning graduates an extra £3,000 unless the government intervenes, according to the Institute for Fiscal Students.

Interest rates on post-2012 student loans are based on the retail prices index (RPI), with the rise in the RPI in March meaning most recent graduates in England and Wales will be charged 9% from September, up from the current rate of 1.5 %.

The IFS analysis found that higher-earning graduates will be most directly affected by the increase, since they are more likely to repay their entire loan within 30 years of graduation. Other graduates will see any outstanding balance wiped after 30 years.

Highly paid graduates – those earning more than £49,130 ​​– are charged an additional three percentage points (v low earners), so interest rates on their loans will rise from 4.5% to 12%. Those with student loans of £50,000 will accrue an extra £3,000 in debt until March 2023, when interest rates are next revised.

Ben Waltmann, senior research economist at the IFS, said: “Unless the government changes the way student loan interest is determined, there will be wild swings in the interest rate over the next three years.

“The maximum rate will reach an eye-watering level of 12% between September 2022 and February 2023 and a low of around zero between September 2024 and March 2025.

“There is no good economic reason for this. Interest rates on student loans should be low and stable, reflecting the government’s own cost of borrowing. The government urgently needs to adjust the way the interest rate cap operates to avoid a significant spike in September.”

The National Union of Students (NUS) said the increases were “brutal” and likely to add thousands of pounds to graduate loans at a time when many were struggling.

“Students aren’t cash cows, and we can’t keep taking the brunt of this government’s regressive actions that have left millions exposed to hardship,” said Hillary Gyebi-Ababio, NUS vice-president for higher education, who wants the government to reverse the changes.

Bridget Phillipson, the shadow education secretary, said the increases were another symptom of the cost of living crisis.

“As working graduates battle rising prices and the chancellor’s growing tax burden, soaring interest rates risk piling on more pressure,” Phillipson said.

A spokesperson for the Department for Education said student loans differed from commercial loans, with repayments linked to income, not to interest rates or the amounts borrowed. They stressed that borrowers earn below the threshold of £27,275 a year before tax make no repayments.

“The IFS report makes it clear that changes in interest rates have a limited long-term impact on repayments, and the Office for Budget Responsibility predict that RPI will be below 3% in 2024,” the DfE spokesperson said.

“Regardless, the government has cut interest rates for new borrowers so from 2023-24, graduates will never have to pay back more than they borrowed in real terms.”

The government’s recent overhaul of student loans will from 2023 extend payments to 40 years instead of 30, and bring in lower starting thresholds for repayments that are likely to cost lower and middle income graduates an extra £30,000 across their lifetimes.

Students who start courses in 2023 to 2024, and who go on to earn £50,000 or more, will save about £20,000 compared with the current loan system because of lower interest rates.

Nick Hillman, director of the Higher Education Policy Institute, said: “One modest thing the government could do immediately to ease the situation would be to move to a more respected measure of inflation.

“Four years ago, the Office for National Statistics said RPI was a bad measure of inflation and should not be used in public policy. Now would be a good time to look again at its use for student loans.”

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