Buckle Up: A brutal rollercoaster of student loan interest rates to hit this September
May 7, 2022
4 min read
What's going on here?
Students and graduates in England will pay up to 12% interest on their loans from this autumn, according to the Institute for Fiscal Studies (IFS).
What does this mean?
The IFS claims that a rollercoaster of interest rates lies ahead for student loans, yet supposedly the long-term outlook on repayments will not be significant. Reference to a rollercoaster is made due to the frequent fluctuations that student loans will be subject to over the coming years. Come autumn, interest rates for those earning £49,130 or more will rise from current rates of 4.5% to a painful 12% for six months. In the same period, interest rates for those earning below the repayment threshold of £27,295 are set to rise from 1.5% to 9%. If you earn between these two benchmarks, you will pay interest based on a sliding scale of between 9% and 12%. By March 2023, the maximum student loan rate will fall to around 7% and continue to fluctuate between 7% and 9% for 18 months. In September 2024, the interest rate is predicted to fall to 0% before rising again to around 5% in March 2025.
For reference, under the 12% interest rate, a very high-earning recent graduate, on more than £49,130 a year, would be charged £3,000 in interest on a balance of £50,000 over six months. On the other hand, a graduate earning below the £27,295 earning threshold would be charged £2,300 on the same balance over the same period.
What's the big picture effect?
Inflation is truly creeping into every aspect of our lives currently, and student debt is no exception. The reason why student loan interest rates are jumping to 12% in September is because of the Retail Price Index (RPI). The RPI is one measure of inflation, the other being the Consumer Price Index (CPI). For the majority of students and graduates in England and Wales, the rate of interest charged on student loans is RPI plus 3%. Currently, the RPI is 9%, hence the 12% interest rate quoted above. This is the highest rate seen since tuition fees for university students in England were raised to £9,000 in 2012. Just four years ago, the Office for National Statistics claimed that RPI was a bad measure of inflation and should not be used in public policy. As the cost of living crisis shows no sign of slowing down, this comes at a particularly inconvenient time. Students and graduates will have no choice but to endure a significant interest rise on existing debt.
This brutal increase of 12% has drawn sharp criticism. The increase has been deemed an attack on opportunity, suggesting that the current scheme will deter underprivileged students from accessing higher education that can give them social mobility and further career opportunities. Proportionality and fairness have been at the heart of debates concerning student loans. When interest rates on student loans increased to 6% in 2017, this triggered a political debate about whether the system was fair. Arguments for reducing the interest rate contended that the current system threatens a student loan debt crisis in the mid-2020s. Certainly in 2022, this seems within the realm of possibility.
This increase in interest rates is coupled with a radical shake-up of the higher education system. The student loan reforms announced in February claim to reduce costs for the Treasury, saving money for the taxpayers. The new system is due to affect students who start university from September 2023. However, Ben Watlmann, the author of the IFS report, contends that while the “reform will reduce the cost of loans for the taxpayer, borrowers with lower earnings will pay a lot more”, adding that “the system has been made less progressive by this”.
Graduates on lower to middle earnings will lose an additional £30,000 from their lifetime income while higher-earning graduates, earning approximately £50,000 will pay around £20,000 less than under the current system. The government reforms have also targeted the lower thresholds as graduates will begin paying back their student loans with a 9% cut of their salary above earnings of £25,000 compared to the current £27,295 threshold. Repayments must be made for 40 years before the loan is forgiven, as opposed to 30 years under the current system. The IFS report revealed that more than 70% of graduates will repay loans in full under the new system compared with about 20% now. Larissa Kennedy, president of the National Union of students, argued that “The minister is saddling young people with unimaginable debt for the next 40 years of their lives. This is nothing more than an attack on opportunity”.
At face value, this seems like a major policy disaster. Not only is this increase in interest rate vastly more than average mortgage rates, but also more than some types of unsecured credit. It is a strange concept that the Government is charging young people with higher interest rates than private lenders. Additionally, the reforms proposed by the Government seem regressive and posed to punish low and middle earners the most. Unfortunately, the financial burden faced by students only seems to be growing.
Report written by William Sutcliffe
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