Millions of graduates will pay less interest on their student loans from September, while more people with a pre-1998 mortgage-style loan will qualify to defer theirs from then too.

The Government has today confirmed that March's Retail Price Index (RPI) rate of inflation at 0.9% will be used to calculate the amount of interest graduates pay on their student loans, while the new earnings thresholds graduates begin to repay their loan from have also been confirmed.

Here's a summary of what you'll pay from 1 September:

  • Pre-1998 "mortgage style loans": The current interest rate is 2.5%, but this will drop to 0.9% from 1 September – it's always the previous March's RPI. With these loans you currently make repayments if you earn over £26,727/year, but this will rise to £28,828/year from 1 September.

  • 1998-2011 "income contingent loans": The current interest rate is 1.5%, but this will drop to 0.9% from 1 September – it's calculated using the Bank of England base rate plus 1%, or the rate of inflation, whichever is lower. With these loans you currently pay 9% of everything earned above £17,335 a year. This will rise to £17,495 from April 2016.

  • Post-2012 "new-style income contingent loans": These students haven't begun repaying their loans yet – the first graduates will start to in April 2016. But they are racking up interest while they study – the current interest rate is 5.5% falling to 3.9% from 1 September – it's calculated using the previous March's RPI plus 3%. In the April after graduating this interest rate will fall to 0.9% if they earn £21,000 and under, rising gradually to the maximum 'inflation plus 3%' if they earn £41,000 or above.

    These borrowers will repay 9% of everything earned above £21,000 a year. This threshold hasn't changed from what's previously been announced, although it's planned to start rising with UK average earnings from 2017. However, the Government is currently consulting on freezing this income threshold for five years, which MoneySavingExpert.com founder and editor, Martin Lewis, has vocally opposed.

See MoneySavingExpert.com's Should I Repay My Student Loan?, Student Checklist and Student Loans Mythbusting guides for more help on everything student loan related.

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'Today's announcement is good news for 3.5 million former students'

Martin says: "The interest rate announced today is good news for 3.5 million former students as well as those who will start repaying from April 2016.

"The rate you pay has always been set on March's RPI figure and that was far lower this year at 0.9%, compared with last year's 2.5%.

"It's worth noting with rates this low, no former student should be overpaying their loans as you can earn more in a top paying cash ISA or savings account."

What about the deferment rate for pre-1998 loans?

The Government's today confirmed that the threshold at which pre-1998 students can defer their loans – meaning they can put off repaying it for a year – is increasing from £26,727 currently to £28,828 from 1 September.

This doesn't affect anyone's current deferral period – this will continue as normal until the agreed end date. It just means more mortgage style graduates will be eligible to defer from 1 September.

Deferment application forms are processed annually with renewal forms sent out eight weeks before the renewal date.

If you're not currently eligible for deferment but will be from 1 September and you want to put off repayments, contact whichever company administers your loan: Erudio, Honours or Thesis Servicing.

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