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Student loan interest rates set to drop in September – what you need to know

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Student loan interest rates are set to drop for many students from September. Current students in England and Wales, for example, can expect to see the interest rate they're charged fall from 5.6% to 4.5%. Meanwhile, many former students with outstanding loans will likely see their rates dip too – though the changes are yet to be finalised by the Government, so for now we can only predict what'll happen.

March's Retail Prices Index (RPI) measure of inflation, which has just been published, has always historically dictated student loan interest for the following academic year, though the Government doesn't confirm what's changing until later in the year. If interest rates are linked to March's RPI as expected, then many will drop, as March 2021's RPI was 1.5%, down from 2.6% last March. 

The amount of interest you pay depends on when you started studying, and the calculation is usually a certain percentage plus RPI. For current students in England and Wales, it's RPI plus 3% – hence why their rate is set to drop to 4.5% in September.

While a lower rate will come as good news to many, MoneySavingExpert.com founder Martin Lewis has always warned loan borrowers to take interest rates on student loans with a pinch of salt, as for most people the interest you end up actually paying is far less than the amount that's added to your loan statement. See our Student Loans Mythbusting guide for more key student finance need-to-knows.

Many students should see a reduction to the interest rates they're charged

Assuming the Government continues to follow the same methodology as every year since student loans started, here are the new interest rates you can expect to be charged:

  • Plan 2 loans – all English & Welsh undergrad loans for those who STARTED uni in/after 2012. Here, the rate you pay depends on whether you’re at university or have left. 

    While studying: The interest rate is set at inflation (RPI) + 3%. That currently means you’re charged 5.6%, and from September we predict this will fall to 4.5%.

    After studying: From the April after you graduate the interest rate depends on your salary. 
    - Earn under £27,295: It is set at inflation (RPI), so it's currently 2.6%. From September, we predict it will fall to 1.5%. 
    - Earn over £49,130: It is set at inflation (RPI) + 3%, so it's currently 5.6%. From September, we predict it will fall to 4.5%. 
    - Earn between the two: It is a sliding scale.

  • Plan 1 loans – all English and Welsh undergrad loans for those who STARTED uni between 1998 and 2011 PLUS all Northern Irish undergrad and postgrad loans since 1998. 
    - The interest rate is set at the lower of inflation (RPI) or the Bank of England base rate (currently 0.1%) + 1%.
    - So it's currently 1.1%. From September, we predict it will stay at at 1.1% unless the base rate increases in the meantime.

  • Plan 4 loans – all Scottish undergrad and postgrad loans for those who STARTED uni in/after 1998. This is a new plan, which Scottish students on Plan 1 were automatically moved onto earlier this month
    - The interest rate is set at the lower of inflation (RPI) or the Bank of England base rate (currently 0.1%) + 1%.
    - So it's currently 1.1%. From September, we predict it will stay at at 1.1% unless the base rate increases in the meantime.

  • All pre-1998 undergrad loans.
    - The interest rate here is set at inflation (RPI).
    - So it is currently 2.6%. From September, we predict it will drop to 1.5%.

  • Postgraduate loans from England and Wales. 
    - The interest rate is set at inflation (RPI) + 3%. 
    - So it is currently 5.6%. From September, we predict it will drop to 4.5%. 

Changes to student finance have been postponed

In 2018, the Government launched a wide-ranging review of student finance, supported by an independent external chair, Dr Philip Augar, and a panel. The panel's findings were published in a report in May 2019.

Prior to the review, there had been calls for the Government to abandon the use of RPI to calculate interest rates in favour of the Consumer Prices Index (CPI)  – CPI is usually lower than RPI.

But while the report noted "widespread concerns" about the quality of the RPI measure, it did not make a specific recommendation about replacing it, saying that it was "a matter for the Treasury". However, it made a series of other recommendations for how interest should be charged, including capping this at the RPI figure for current students (instead of RPI + 3%, as it stands now).

In its interim conclusion to the review, published in January 2021, the Government did not mention student loan interest rates, leaving a full conclusion to a later date – it's unclear when this will take place, as the comprehensive spending review which it is linked to has not yet been scheduled. At the time, the Government blamed its lack of response on its need to focus on the pandemic.

What does the Government say?

A Department for Education spokesperson said: "The student finance system is designed to remove financial barriers for those hoping to study, and repayments are based on income, not the interest, or the amount borrowed.

"Interest rates for student loans are set annually, and the SLC, on behalf of the Government, will announce them in August 2021.

"The majority of borrowers will not fully pay back their loans and will see this part of their borrowing written off with no detriment to the borrower."

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