Student loan interest rates to be capped at 7.3% from September
Student loan interest rates are set to rise from 4.5% to 7.3% for many from September, the Government has announced. The change will affect current students in England and Wales, as well as former students with outstanding loans who started university in/after 2012.
The interest rates used for many student loans are usually based on March's Retail Prices Index (RPI) measure of inflation and are usually confirmed in August. They had been expected to jump to 12%. However, the Department for Education has brought forward its announcement and says it has capped interest rates to a maximum of 7.3% for a year "to protect graduates from a rise in inflation".
This change won't affect borrowers' monthly payments but does mean some will now owe less than they would have done overall, had the rate increased to 12% as predicted.
'In practice, any financial gain is only for the highest earning graduates'
Student loan repayments are calculated by income rather than interest. If you're not earning, or earning less than the threshold for your loan, you don't pay anything back.
If you are making repayments, then unless you are a high earner and will pay back most or all of your loan before it's wiped (which happens 30 years after you leave university), the amount of interest added doesn't make a difference to the amount you'll repay.
MoneySavingExpert.com founder Martin Lewis said: "It's a psychological boost but in practice any financial gain is only for the highest earning graduates as the rest wouldn't repay the extra interest in the 30 years before the loan wipes."
"To be fair, this is what many students have asked for (I suspect many through fear rather than the actual impact). Though in my view a bigger priority is ending the frozen repayment threshold (which adds a lot to loan costs) and maintenance loan rises to cover cost of living."
Some student loan repayment thresholds were frozen in April and there'll be a new loan system for many starting university in 2023
A number of changes to the higher education funding system were already announced earlier this year. Here's a quick round-up with links to more information where relevant:
- As of 6 April 2022: Plan 2 repayment thresholds were frozen. The annual earnings threshold at which these borrowers start paying back their loans has been frozen at £27,295 until 2026/27, which adds around £113 a year to the total most will repay this year.
- As of 6 April 2022: Postgraduate loan repayment thresholds were frozen. The annual earnings threshold at which these loans start being repaid was frozen at £21,000 a year into the 2022/23 financial year, meaning many university leavers will pay £87 a year more than they would have done.
- As of 6 April 2022: Plan 1 and Plan 4 repayment thresholds rose. The annual earnings threshold at which borrowers pay back Plan 1 loans increased from £19,895 a year to £20,195 a year. For Plan 4 loans the threshold rose from £25,000 a year to £25,375 a year.
- For students starting university from September 2023, there's a new loan repayment plan. This will see students pay off their loans over 40 years instead of 30 and will cap the interest rate for repayments at the Retail Prices Index (RPI) rate of inflation. The loan repayment threshold for this new plan is set at £25,000 until 2025/26.
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