Hundreds of thousands of graduates who started university before 1998 face a hike in the interest charged on their student loan next month.

Meanwhile, the interest rate for those who took out a loan in 1998 or later could rise too, if the Bank of England base rate rises over the next year. This affects those who get their A-level results today who start university in September.

Key Points

  • Pre-'98 starters rate rises from 4.4% to 5.3%
  • Others still pay 1.5% but increase possible

The Student Loans Company this week confirmed the rates it will charge from September, which vary depending on when students first borrowed the cash.

  • Pre-1998 starters. For anyone who took a loan before 1998, their interest rate is pegged for the entire academic year to the previous March's Retail Price Index (RPI) inflation figure, which stood this year at 5.3%.

    Therefore, graduates will see the rate jump from the current 4.4% to 5.3%.

  • Starters since 1998. Interest rates on loans taken out in 1998 or after also change every academic year to the previous March's RPI rate.

    Yet there is a caveat that if the base rate used by banks (effectively, the Bank of England rate) plus one percentage point is lower than the March RPI figure, the student loan rate will fall to that. Current low interest rates (Bank rate is 0.5%) mean this is in effect, and the interest rate charged is currently 1.5%, which remains unchanged from next month.

    However, if base rate rises, so too will the rate charged to borrowers. Few economists expect the base rate to rise any time soon, however, none have a crystal ball. In fact, many predicted a May rise in 2011 which never happened.

Around 2.2 million people who first took out a loan from 1998 have outstanding balances, while roughly 355,000 have pre-1998 loan debts owing.

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