Hundreds of thousands of students who start university this year are likely to face interest rates of 6.6% on their loans from September, higher than many mortgage rates.

This adds to the already higher cost of university for some 2012 starters, given tuition fees will rise to up to 9,000-a-year from a current 3,375-a-year maximum.

Students can get loans to cover those fees as well as for living costs, though as the loan debt is automatically cleared after 30 years, some may never have to repay it in full.

Currently, loan interest is set at no more than the rate of inflation so there is no cost in real terms. Most pay just 1.5%. This is a departure from that.

The interest rate will continue to be based on the retail prices index (RPI) measure of inflation, but while studying, a further 3% points will be added.

For the current loan system, the RPI figure announced for the prior March determines the rate for the academic year. It is extremely likely the same will happen for 2012 starters, but this has not been confirmed.

That RPI figure was revealed today at 3.6%, meaning the interest rate for the first year of studies for those starting in September is likely to be 6.6%. This rate will be confirmed in August.

This formula changes in the first April after graduation, when the interest switches to being based on earnings, varying from RPI inflation to RPI plus a further 3% points.

'Could be deterrent'

Martin Lewis, creator of MoneySavingExpert and head of the Independent Taskforce on Student Finance Information, says: "At 6.6%, 3% above RPI inflation, while they're studying, for the first time student loan interest is at the same rate as the best buy commercial lending.

"One of my primary objections to the new system is that for the first time we are not just charging people for their education, but charging them for the financing of their loans too.

"The worry is the high headline rate of interest is psychologically damaging and acts as a deterrent. What's most frustrating is many who don't earn large after university will never actually pay this interest with bigger fees combined with lower monthly repayments, they won't clear their debt before the 30 years when it wipes.

"Yet, sadly, I doubt that'll stop it putting some off."

If you or your child is going to uni in 2012, ensure you fully understand the system. You can afford to go to university. Read the Students 2012 mythbusters guide and Martin's blog on why for many it'll be interest-free.

On Our Forums

Student interest hike