Latest news about interest rate for student loans

You can’t get away from hearing and perhaps feeling, that the cost of living is soaring.

You will undoubtedly have heard that inflation is hitting a 40 year high of 9% with talk of it reaching 11% in October…  but what does this actually mean for your student loans?

What is inflation?

Inflation is the increase in the price of something over time. For example, if a loaf of bread costs £1 one year and £1.09 the next year, then that’s an annual inflation rate of 9%.

How does this affect my loan balance?

The recently announced interest rate cap will affect both Plan 2 + Plan 3 loans.

If you’re a current undergraduate student from England or Wales and started university in/after 2012 , it is most likely you are on a Plan 2 loan.

If you’re currently receiving a Postgraduate Master’s loan in England or Wales and you started the course on or after 1 August 2016, you will be on a Plan 3 loan.

It is also possible that you have 2 different loan plans, so it is worth checking which plan or plans you currently have on the gov.uk website.

What about Interest Rates?

You may or may not remember reading when taking out your student loans, that whilst studying, the interest rate on your loans are calculated by the rate of inflation (RPI) + 3%.

Last year (Sept 2021- 31^st Aug 22) your loans were accruing using the March 2021 inflation rate: 1.5% + 3% = 4.5% interest.

The inflation rate in March 2022 skyrocketed to 9%.

On the usual calculation of interest this would mean that the Government would charge the new RPI 9% + 3% = 12% interest on your loans.

However on 11 June, the government announced they will cap student loan interest rates to protect borrowers from this rise in inflation and instead a maximum interest rate of 7.3% will be applied to current Plan 2 + 3 student loans.

This capped interest rate of 7.3% will apply from 1 September 2022 to 31 August 2023 at which point the interest rate is expected to change subject to the current market interest rate at that time.

How will this cap affect you?

Don’t panic.. This raise in interest rate will have little or no immediate effect on you.

The amount you owe ie the loan + interest, never has an impact on the amount you repay each year as repayment rate solely depends on your salary.

Student loans are repaid as a percentage of your gross salary above a certain threshold:

For Plan 2 loans, from the April after you finish or leave the course, you will repay loans at a rate of 9% of everything you earn above £27,295 each year. This threshold figure will be frozen until 26/27.

If you’re not earning, or earning less than the threshold for your loan, you don’t repay anything.

If you are making repayments, the amount you repay doesn’t vary because you’re suddenly being charged more interest.

For example:  if you are on a salary of £37,295 (£10,000 above the threshold) and your end student loan & interest value came to:

• End student loan & interest value came to £20,000.

9% of everything above £27,295 = £10,000 your annual repayment is £900.

• Student loan & interest value came to £50,000.

9% of everything above £27,295 = £10,000 your annual repayment is £900.

As you can see, changing what you owe simply doesn’t impact your repayments.

Currently, only 17% of Plan 2 borrowers repay their student loan in full.

Unless you’re a high earner and will pay back most or all of your loan before it’s wiped (which happens 30 years after you leave university), the amount of interest added doesn’t make a difference to the amount you’ll repay, which hopefully provides some relief!

During these financially strained times, accruing student loan debt can be one thing you can strike off the immediate worry list, but we are here to explain things if you do have concerns or questions so don’t hesitate to call us on 01273 642888 or email studentadvice@brighton.ac.uk.

Student Advice Service