Student loan repayment thresholds will rise by hundreds of pounds next April, but many students and former students from England and Wales will see interest rates increase to 6.3% in September – here's why you shouldn't panic.
The Department for Education has this week confirmed how the student loan rates and repayment thresholds will rise for the forthcoming year.
MoneySavingExpert.com had previously reported that a rate hike was expected due to an increase in the Retail Prices Index (RPI) inflation figure to 3.3% in March. RPI has always been used to dictate student loan interest for the following academic year.
However there's no need to panic, as bizarrely for most people the interest you end up actually paying is far less than the amount that's added to your loan statement.
How much can I earn before I start repaying my loan?
The repayment threshold will rise for most student loans from 6 April 2019:
- Plan 2 loans: All English & Welsh loans for those who STARTED uni in/after 2012. The repayment threshold will increase from £25,000 to £25,725/year.
- Plan 1 loans: ALL loans for those who STARTED between 1998 and 2011 PLUS Scottish & Northern Irish loans since 2012. The repayment threshold will increase from £18,330 to £18,935/year.
- Pre-1998 loans. The deferment threshold will increase from £29,219 to £30,737/year.
- Postgraduate loans. The threshold will remain at £21,000/year.
What the interest rate increases mean for you
Here's how the interest rates will change from 1 September 2018.
- Plan 2 loans: All English & Welsh loans for those who STARTED uni in/after 2012. While studying you're charged RPI + 3%, so from 1 September you will be charged 6.3%.
From the April after you graduate, the interest rate is RPI (3.3%) if you earn under £25,000 (£25,725 in April '19), up to RPI + 3% (6.3%) if you earn over £45,000 (£46,305 in April '19) and a sliding scale in between.
- Plan 1 loans: ALL loans for those who STARTED between 1998 and 2011 PLUS Scottish & Northern Irish loans since 2012. Here the rate is set as the lower of the RPI rate of inflation or the Bank of England base rate + 1%. The base rate increased to 0.75% in early August, which means your new interest rate is 1.75% from 1 September.
It will stay this way unless the Bank of England raises the base rate again, but the max you'll currently be liable to pay is 3.3%.
- Pre-1998 loans. The rate here is simply the RPI rate, so will rise to 3.3% on 1 September.
- Postgraduate loans. The rate is set at RPI + 3%, so this will also increase to 6.3%.
'What matters is the interest you'll pay, not what's added to your account'
How the increased rates will affect you depends on which loan you have, but don't panic.
Commenting on the potential hikes when reported by MSE in April, MoneySavingExpert.com founder Martin Lewis said: "What counts is the interest that you'll pay and not what's added to your account. Those two things are radically different."
To understand more about student loan interest rates and how you may be affected, see Martin's two in-depth guides.
- Pre-1998 loans & Plan 1 loans – Should I repay my student loan?
- Plan 2 loans – Student loan interest rates are rising – should I panic or pay it off?