Student loan interest rate rise

Martin Lewis says “the interest that is added to your account is mostly meaningless”

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."

-ends-

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.

About Martin Lewis: Martin Lewis OBE, Money Saving Expert, is the journalist and consumer campaigner who created MoneySavingExpert.comand is now the site’s Executive Chair. Martin also founded and chairs the Money and Mental Health Policy Institute charity.

He’s the UK’s most-googled man, Citizens Advice’s Consumer Champion of the Year, and has spearheaded major financial justice campaigns including bank charges reclaiming (over seven million template letters downloaded), PPI reclaiming (over six million) and a successful large-scale campaign to get financial education in schools. He has his own prime-time ITV programme, The Martin Lewis Money Show, as well as a range of other regular media slots. He was appointed OBE in the Queen’s Birthday Honours in June 2014.

About MoneySavingExpert.com: MoneySavingExpert.com is dedicated to cutting consumers’ bills and fighting their corner. The free-to-use consumer finance help resource aims to show people how to save money on anything and everything, and campaigns for financial justice. It was set up in 2003 for just £100, and its free-to-use, ethical stance quickly made it the UK’s biggest independent money website, according to internet ranking site Alexa.com, and the number one ‘Business and Finance – Business Information’ site, according to Hitwise. It has more than 12 million people opted-in to receive the weekly MSE’s Money Tips email, and more than 16 million unique monthly site users who visit more than 28 million times a month. In September 2012, it joined the MoneySupermarket.com Group PLC.