Student loan interest rates to fall from September, but fewer graduates eligible to defer

The Government has today confirmed that March's Retail Price Index (RPI) of 2.5% will be used to calculate the amount of interest graduates with a pre-1998 loan and graduates with a post-2012 loan will pay between 1 September 2014 and 31 August 2015 (see our Student Loans Mythbusting guide).

But the Government is also changing the threshold at which some graduates have to start repaying their loan and fewer graduates with a pre-1998 loan will now qualify to put off repaying their loan for a year.

From 1 September only those who earn £26,727 or less will be able to apply to defer their loan for a year. At present anyone earning £28,775 or less can defer paying theirs back. It's the first time since 2010 the deferral rate has fallen year-on-year.

The Government says the deferment threshold is calculated from scratch each year based on average earnings – it is not an adjustment from a previous year.

What are the new interest rates?

As March's rate of inflation was 2.5%, it means graduates will pay the following in interest from 1 September:

• 1990-1998 "mortgage style loans": The current interest rate is set at 3.3%, but this will drop to 2.5%.

• 1998-2011 "income-contingent loans": The current interest rate is 1.5%, set at either the Bank of England base rate plus 1%, or the rate of inflation, whichever is lower.

• Post-2012 "income contingent loans": The current interest rate is set at 6.3% (March 2013's RPI + 3%), but this will drop to 5.5%.

What are the new repayment thresholds?

But with all of these loans you only start repaying once you earn over a set amount each year, and the Government has today confirmed that from 1 September it will change these goal posts for some. Here's what's happening:

• Pre-1998: With these loans you currently must make repayments if you earn over £28,775. But from 1 September the income threshold above which you must make repayments will drop to £26,727 – though in both cases you can choose to repay before that.

• 1998-2011: With these loans you currently repay 9% of everything earned above £16,910 a year. This threshold will increase to £17,335 from 1 April 2015.

• Post-2012: With these loans you'll have to repay 9% of everything earned above £21,000 a year. This threshold hasn't changed, although no-one will have started to repay these loans yet.

My loan is currently deferred. What should I do?

The Government says deferment applications are assessed using the applicable threshold on the date the deferment application form is received. So technically anyone with a pre-1998 loan earning over £26,727 who is planning to defer should submit their application before 1 September.

Applications received after 31 August will be assessed on the lower income threshold rate of £26,727.

Today's news doesn't however affect anyone's current deferral period – this will continue as normal until the agreed end date.

According to the Student Loans Company deferrals forms can only be processed annually, when they are due for renewal. It sends out forms eight weeks before the renewal date and says those eligible for deferral under the current threshold will already have been sent forms to be complete.

See the Should I Repay My Student Loan?, Student Checklist and Student Loans Mythbusting guides for more help.