Current students from England and Wales will almost certainly see the rate of interest on their student loans rise from 6.1% to 6.3%(1) in September - and many former students with outstanding loans will see their rates rise too. But there’s no need to panic, says Martin Lewis, founder of the UK’s biggest consumer website, MoneySavingExpert.com, as bizarrely for most people the interest you end up actually paying is far less than the amount that's added to your loan statement.
The reason for this rise is the Retail Prices Index (RPI) measure of inflation for March was announced as 3.3% today, up from 3.1% last year, and that is the rate that has always dictated student loan interest for the following academic year (though this isn't something that is confirmed until later in the year).
Martin Lewis, founder of MoneySavingExpert.com said: "Millions of students and recent graduates will let out a collective groan at the news that almost certainly in September student loan interest rates will rise - many are already petrified when they see their loan statement grow by so much each month.
"And so with the headline rate for current students now 6.3% many will look and wrongly think that they'd be better to get out other cheaper debt elsewhere to pay it off.
"Yet actually in reality for the vast majority of students who have the highest rates, those on Plan 2 loans (England and Welsh uni starters since 2012) - the interest that is added to your account is mostly meaningless as it is totally different to the interest you'll actually pay.
"This is because what you repay is based on earning not what you owe – you repay 9% of everything above £25,000. In fact it's estimated that only the highest earning 17% of graduates will repay all the interest added to their account, because only they will clear their loan in full in the 30 years before the debt wipes.
"The rest will pay less. Many will pay some interest, though it could be less than inflation, some won’t pay any interest as they won't repay enough to clear their original debt, and the very lowest earners won't repay anything at all.
"So you can't compare student loan interest to other types of personal finance and say 'the rate’s higher I'd be better to borrow elsewhere to pay it off.' What counts is the interest that you'll pay and not what's added to your account. Those two things are radically different."
Notes to editors
For more information, please see the MoneySavingExpert.com news story .
Worrying about your student loan? See Martin's Should I panic or pay it off? guide for post-2012 loans for more info.
(1) Assuming the changes follow the pattern for every year since student loans started, here are the new interest rates:
Plan 2 loans - All English & Welsh loans for those who STARTED uni in/after 2012.
While studying you're charged RPI + 3%, so you're currently charged 6.1%, and from September, will be charged 6.3%.
From the April after you graduate, the interest rate is RPI if you earn under £25,000 (so it will increase from 3.1% to 3.3%), up to RPI + 3% if you earn over £45,000 (so it will increase from 6.1% to 6.3%) and a sliding scale in between.
Plan 1 loans: ALL loans for those who STARTED between 1998 and 2011 PLUS Scottish & Northern Irish loans since 2012.Here the rate is set as the lower of the RPI rate of inflation or the Bank of England base rate + 1%. As the Bank of England base rate is currently very low at just 0.5%, it means the interest rate is currently 1.5%.
And it will stay at that rate next year, unless UK base rates increase (when it'll increase too). All that today's news changes is that from September the maximum the base rate can rise to is 3.3%, as opposed to the current 3.1%.
Pre-1998 loans.The rate here is simply the RPI rate, so currently it is 3.1% and will rise to 3.3% in September.
Postgraduate loans.The rate is set at RPI + 3%, so it is currently 6.1% and will rise to 6.3% from September.