Student loan interest to rise for 100,000s

Meanwhile the maximum interest rate that could apply for those who started since 1998 could increase too, if base rate rises this year.

The amount of interest paid on a student loan depends on when you were a student.

• Pre-1998 starters. For anyone who took a loan before 1998, their interest rate - which has always been set every September - pegged to the previous March's Retail Price Index (RPI) inflation figure, which stood this year at 5.3%.

  Providing that pattern of rate-setting is followed, this year's rate will jump from its current 4.4%.

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

  Yet there is a caveat that if the banks' base rate plus 1% is lower than the March RPI figure, then the student loan rate will reduce to that. Current low interest rates mean this is in effect, and the interest rate is currently 1.5%.

  However, if base rates rise, as many predict, then this interest rate will rise immediately each month. Currently the maximum it could go to is 4.4% but from September that will be 5.3% - if March's RPI rate is used as usual.

Around 2,278,400 people in the UK who first took out a loan from 1998 have outstanding balances, while roughly 355,300 have pre-1998 loan debts owing.

Some experts expect the base rate to rise later this year, others next year. However, many predicted a May rise in 2011 which never happened.

The Department for Business, Innovation and Skills, says it's yet to confirm the rates for September though the decision appears a formality, unless government rules change. The system is set for a complete overhaul for students beginning university in the 2012/13 academic year (see the Tuition fees furore MSE News story).

Martin Lewis, creator of MoneySavingExpert.com says, "It’s likely everyone with existing student loans will see an interest rate rise this year.  For most the actual rise in interest won’t affect the level of repayments as these are fixed regardless of amount owed, but it will mean it takes a bit longer to repay.  

"Our usual rule is not to overpay your student loan, and instead put the cash in a savings account, assuming you’ve no other debts. Yet presuming this rate rise is confirmed, with student loan rates at 5.3% and savings rates currently at historic lows, from September it is likely to be worth using cash to clear student loan debts in the short term."