Millions of graduates will pay more interest on their student loans from September, because the inflation rate these rates are linked to has risen sharply over the past year.
The Retail Prices Index (RPI) measure of inflation for March this year - used to calculate the amount of interest graduates pay on their student loans - stood at 3.1%, nearly double the 1.6% at the same point 12 months ago.
Today the Student Loans Company (SLC) confirmed that interest rates on loan repayments will continue to be updated each September using the RPI from March of the same year - leaving millions of graduates facing greater interest.
Here's a summary of what you'll be charged from 1 September 2017:
- Pre-1998 'mortgage-style loans': The current interest rate is 1.6%, but this will rise to 3.1% from 1 September – it's always the previous March's RPI. With these loans you currently make repayments if you earn over £29,126/year.
- 1998-2011 'income contingent loans': Rather than increase to the March RPI rate of 3.1%, the interest rate will remain at 1.25% from 1 September. This is because the historically low Bank of England base rate of 0.25% has activated an 'interest cap'.
When the base rate +1% is lower than the March RPI, the lower figure is used, therefore acting as a cap in times of low interest rates.
With these loans you pay 9% of everything earned above £17,775/year (this threshold increased from £17,495/year as of the start of April).
- Post-2012 'new-style income contingent loans': If you graduated last summer, you will have been charged 4.6% ( March RPI of 1.6% + 3%) from September 2016 until April 2017 – the same rate those still studying are charged from last September until August 2017.
From this September, you'll be charged 3.1% interest if you earn £21,000/year rising gradually to 6.1% at £41,000/year and above.
Everyone with a post-2012 loan will repay 9% of everything earned above £21,000/year. This £21,000 threshold was initially scheduled to rise with UK average earnings from 2017. However, the Government has now frozen it until at least April 2021, meaning many graduates will pay back more than they first expected to.
MoneySavingExpert.com founder Martin Lewis has fiercely campaigned against this retrospective hike in payments.
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What about the deferment rate for pre-1998 loans?
The threshold at which pre-1998 students can defer their loans – meaning they can put off repaying it for a year – increased to £29,126 from 1 September 2016.
The deferment threshold is likely to rise again this September, but it's not yet clear what this will be. We'll update this story when we know more.
Deferment application forms are processed annually with renewal forms sent out eight weeks before the renewal date.
Lower air fares offset rising food prices to maintain inflation rate
The Office for National Statistics (ONS) said inflation as measured by the Consumer Prices Index (CPI) remained steady at 2.3% last month.
A drop in air fares helped put downwards pressure on prices but food prices were 1.2% higher than last year, which was the biggest annual rise in three years.