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Student loan interest rates to rise from September – what it means for you

Businessperson's Hand Using Calculator Beside Piggybank With Graduation Hat

Student loan interest rates will rise for many this week. But this WON'T make a difference to your monthly repayments. Here's what you need to know.

From 1 September, the amount of interest graduates are charged on their student loans will rise. The new interest rates are based in part on the Retail Prices Index (RPI) measure of inflation for March, which was published in April – though due to current high inflation some of the rates have been temporarily capped (see below for more on this). 

However, regardless of the cap, MoneySavingExpert.com 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. That's because you only pay back 9% of what you earn above a specific threshold (6% for postgrad loans), and, for most, all remaining debt is wiped after 30 years.

For more information on repaying your student loan, see one of our two detailed repayment guides:

  • If you started uni before 2012, or are Scottish or Northern Irish, see our student loan repayment guide.
  • If you're English or Welsh and started uni in or after 2012, read our Plan 2 repayment guide.

Many students and uni leavers will see a rise in the interest rate they're charged

The amount of interest you're charged on your student loan depends on when you started studying and where in the UK you applied for student finance, and the calculation is usually a certain percentage plus RPI.

Here are the new interest rates you'll see applied to your loan balance from 1 September 2022:

How student loan interest rates will change from 1 September

Repayment plan & interest rate calculation used Current interest rate Interest rate from 1 Sep 22
Plan 2 loans – English and Welsh undergraduate loans for those who STARTED university in/after 2012
Calculations usually used below - but rates will be capped from September.
While studying: The interest rate is set at inflation (RPI) + 3% points

After studying (from the April after you graduate):
- Earn under £27,295: It is set at inflation (RPI)
- Earn over £49,130: It is set at inflation (RPI) + 3% points
- Earn between the two: It is a sliding scale
4.5%


1.5%
4.5%
1.5% to 4.5%
6.3%


6.3%
6.3%
6.3%
Plan 1 loans – all English and Welsh undergraduate loans for those who STARTED university between 1998 and 2011 PLUS all Northern Irish undergraduate and postgraduate loans since 1998
The interest rate is set at the lower of inflation (RPI) or the Bank of England base rate (currently 1.75%) + 1% point 1.5% 2.75%
Plan 4 loans – all Scottish undergrad and postgrad loans for those who STARTED university in/after 1998
The interest rate is set at the lower of inflation (RPI) or the Bank of England base rate (currently 1.75%) + 1% point 1.5% 2.75%
All pre-1998 undergraduate loans
The interest rate is set at inflation (RPI) 1.5% 9%
Postgraduate loans (England and Wales)
Calculation usually used below - but rates will be capped from September.
The interest rate is set at inflation (RPI) + 3% points 4.5% 6.3%

Interest rates for Plan 2 loans and English and Welsh postgrad loans will be capped

As part of the student loan legislation, there's something called the "Prevailing Market Rate" cap, which means that if student loan interest rates are higher than what commercial lenders are charging on the open market, they are capped. 

Because Plan 2 and English and Welsh postgraduate loan interest rates are partly based on inflation, and inflation is currently very high, borrowers on these plans had been facing rates of 12% from September.

However, the cap means rates will be set at 6.3% for these loan borrowers from 1 September until 30 November. They'll be reviewed in December 2022 and could change again at that point. 

Student loan interest rates DON'T affect what you repay each month

Student loans are repaid as a percentage of your gross salary above above a certain threshold, which varies depending on which plan you're on. If you're not earning, or earning less than the threshold for your loan, you don't pay anything back. Yet, even if you are making repayments, the amount you repay doesn't vary just because you're being charged more interest. 

Taking Plan 2 as an example (though the other loans work on the same basis, just with different interest rates and repayment thresholds), students must currently (and also from September 2022) repay loans at a rate of 9% of everything they earn above £27,295 each year. So if you earn £32,295 a year, that's £5,000 more than the threshold, so you'll repay 9% of that – which is £450 a year.

This means the amount you owe (the borrowing plus interest) never has an impact on what you repay each year. To show this, if you were on a salary of £37,295 (£10,000 above the threshold):

Student loan and interest owed: £20,000. 
As you repay 9% of everything above £27,295 your annual repayment is £900.

- Student loan and interest owed: £50,000. 
As you repay 9% of everything above £27,295 your annual repayment is £900.

As you can see, changing what you owe simply doesn't impact your repayments.

According to the Government's own figures, only around a quarter of Plan 2 borrowers will repay their full student loan. And unless you're a high earner and will pay back most or all of your loan before it's wiped (which currently happens 30 years after you leave university), the amount of interest added doesn't make a difference to the amount you'll repay.

Repayment thresholds DO affect what you pay each month – and these have been frozen for many

As set out above, the repayment threshold is the level of earnings at which you start paying back your loans – and as with tax thresholds, generally the higher the threshold, the less you repay each month.

Earlier this year, the Government announced that it would freeze the repayment thresholds for certain plans, in addition to introducing a whole new system for those starting uni in England from 2023. Here's a quick round-up with links to more information where relevant:

  • Plan 2: repayment threshold frozen as of 6 April 2022. The annual earnings threshold at which these borrowers start paying back their loans has been frozen at £27,295 until 2025, which adds around £110 a year to the total most will repay this year. 
  • Plan 1: threshold to rise from 6 April 2023. The threshold will rise from its current level of £20,195 to £22,015, meaning many borrowers will see a reduction in their monthly repayments.

  • Plan 4: threshold to rise from 6 April 2023. The Scottish Government has confirmed that the threshold will rise from £25,375 to £27,660, so many borrowers will repay less each month.

  • 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. 

    School leavers in England getting their A-level results should be aware that deferring for a year means they'll be on this new student finance system and will repay their loan for a much longer period, potentially costing £10,000s more.

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