MSE News

Student loan interest rates to drop for many next month and repayment thresholds to rise for some from April – what you need to know

Businessperson's Hand Using Calculator Beside Piggybank With Graduation Hat

Student loan interest rates will drop for many from September, the Department for Education has confirmed. Plus, from April 2022, Scottish former students and some others with older loans will also be able to earn more before they have to start repaying.

The Department for Education (DfE) published the new interest rates this week, setting out what students will be charged from 1 September. The rates are based in part on the Retail Prices Index (RPI) measure of inflation for March, which was published in April. MoneySavingExpert.com (MSE) had predicted the rate drops at the time – most of which have now been officially confirmed.

In addition, it's been confirmed that the repayment threshold for some borrowers will increase from April 2022. This means people with certain types of student loans will be able to earn more before they have to start repaying.

But while lower interest rates will come as good news to many, MSE founder Martin Lewis has always warned student loan borrowers to take interest rates with a pinch of salt, as for most people the amount of interest they're charged won't affect how much they repay, as you only pay back 9% of what you earn above the threshold (6% for postgrad loans), and for most all remaining debt is wiped after 30 years.

See our Student Loans Mythbusting guide for more key student finance need-to-knows.

Many students will see a reduction to the interest rate they're charged

The amount of interest you're charged on your student loan depends on when you started studying, and the calculation is usually a certain percentage plus RPI. Here are the new interest rates you'll see applied to your loan balance:

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

    While studying: The interest rate is set at inflation (RPI) + 3%. However, there's currently a temporary interest rate cap in place, reducing the maximum rate charged by 0.3 percentage points – so until 31 August, students are charged 5.3%, rather than the 5.6% the formula would normally stipulate. From 1 September, this will fall temporarily to 4.2%, before rising to 4.5% from 1 October when the rate cap is lifted.

    After studying: From the April after you graduate the interest rate depends on your salary and is currently 2.6% to 5.3% (again, this would normally be 5.6% were it not for the current cap). From 1 September, rates will fall to between 1.5% and 4.2% (rising to 4.5% from 1 October). However, the DfE is yet to announce the exact salary thresholds – we're checking when these will be confirmed and we'll update this story when we know more.

  • 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 1 September, it will stay 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 year
    - 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 1 September, it will stay at 1.1% unless there's a base rate change.

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

  • Postgraduate loans from England and Wales. 
    - The interest rate is set at inflation (RPI) + 3%. 
    - It is currently 5.3% as it's also subject to a temporary rate cap. From 1 September, it will drop to 4.2% before rising to 4.5% from 1 October when the rate cap is lifted.

It should be noted that the Government regularly monitors the interest rates set on student loans against interest rates for comparable loans on the market, and it may put further caps in place if market rates are lower – so the rates listed above aren't set in stone. 

Some will be able to earn more before they have to start repaying

The repayment threshold will also rise for some student loans, which means you'll have to earn more before you start paying your loan back:

  • Plan 1 loans: The repayment threshold will increase from £19,895/yr to £20,195/yr from 6 April 2022.

  • Plan 4 loans: The repayment threshold will increase from £25,000/yr to £25,375/yr from April 2022 (we're checking the exact date and will add this in once we know).

  • Pre-1998 undergrad loans: The deferment threshold – the annual salary below which you can opt not to repay your loan, which is used on these loans instead of a repayment threshold – will rise from £30,646/yr to £36,284/yr from 1 September.

    If the higher threshold means you'll be able to defer your loan and you want to do that, contact your loan administrator – Erudio, Honours Student Loans, or Thesis Servicing – for help.

However, we don't yet know if or how the thresholds will change for the following types of loans:

  • Plan 2 loans: The repayment threshold is currently £27,295/yr. The DfE says the threshold that will apply from April 2022 will be announced "in due course".

  • Postgraduate loans: The threshold is currently £21,000/yr. Again, the DfE says an announcement on the threshold will be made "in due course".

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