Student loan interest rates to rise for many next month – what you need to know

The Department for Education published the new interest rates this week, setting out what students will be charged from 1 September. The interest you're charged depends on the kind of loan you have, with the maximum rate rising from 5.4% to 5.6%. Yet there's no need to panic, as bizarrely for most people the interest they end up paying is far less than the amount that's added to your loan statement.

To understand more about student loan interest rates, see MSE founder Martin Lewis's two in-depth guides:

• Pre-1998 & Plan 1 loans: Should I repay my student loan?

• Plan 2 loans: Should I panic or pay off my student loan?

How are interest rates changing?

The underlying student loan interest rate is set each year based on the Retail Prices Index (RPI) inflation measure in March of that same year. In March this year, RPI was 2.6%.

Here's how the interest rates will change from 1 September:

• Plan 2 loans (ie, all loans for English and Welsh students who STARTED uni in or after 2012): While studying you're charged the rate of RPI from March (2.6%), plus 3%. So from 1 September you'll be charged 5.6%, up from 5.4% currently.

  From the April after you graduate, you'll be charged variable interest, depending on your income. Based on the repayment thresholds that will apply from next April (see more on how thresholds are changing below), where income is £27,295 or less you'll be charged interest at RPI (2.6%). That rises on a sliding scale to RPI plus 3% (5.6%), where income is £49,130 or more.

• Plan 1 loans (ie, ALL loans for those who STARTED between 1998 and 2011 plus Scottish and Northern Irish students' loans since 2012): Here the rate is set as the lower of March's RPI (2.6%) or the Bank of England base rate (its official borrowing rate, currently 0.1%), plus 1%. So your interest rate will remain at 1.1%.

• Pre-1998 mortgage-style loans: The interest rate here is RPI, so will rise to 2.6% from 1 September, from 2.4% now.

• Postgraduate loans: The interest rate is set at RPI plus 3%, so will rise to 5.6% from 5.4%.

How much can I earn before I start repaying my loan?

The repayment threshold will rise for most student loans from 6 April 2021 – which means you'll have to earn more before you start paying your loan back:

• Plan 2 loans: The repayment threshold will increase from £26,575/year to £27,295/year.

• Plan 1 loans: The repayment threshold will increase from £19,390/yr to £19,895/yr.

• Postgraduate loans: The threshold will remain at £21,000/yr.

With pre-1998 loans, the deferment threshold – ie, the annual salary below which you can opt not to repay your loan – will FALL from £32,347/yr to £30,646/yr from 1 September. You should contact your loan administrator – Erudio, Thesis Servicing or Honours Student Loans – if you want to defer your loan and the new, lower threshold means you're now able to do that.

'A rates rise may seem unfair – but most won't pay more' 

Helen Saxon, banking editor at MoneySavingExpert.com, said: "While an interest rate rise may seem unfair and unwarranted when so many are struggling with their finances due to the coronavirus, it's not actually as bad as it seems.

"The increase in interest for those on Plan 2 or mortgage-style pre-1998 loans will mean that students and graduates with those loans will owe more overall. However, because of the way loan repayments are structured – you repay 9% of everything over the relevant repayment threshold for your loan – the amount you actually pay back each month remains the same, whether you owe £100, £10,000 or £10 million. And if you earn under the threshold, you don't have to pay anything at all. 

"It's worth noting that most people, particularly those with Plan 2 student loans, will never fully repay their student loan before it gets wiped after around 30 years. So, the only people this really impacts are those with low borrowing or high income who will pay their loan off before it's wiped.

"This interest rate rise is also down to an odd quirk of timing. If the rates were based on April's 1.5% or May's 1% RPI figure rather than March's, we'd be telling you of an interest rate drop from September. The pandemic caused a drop in the rate of inflation, but it came too late to help student loan repayment rates."