Recent graduates could pay an extra £3000 in interest as student loan interest rates are forecast to rise from 4.5% to an “eye-watering” 12% for high earners, and from 1.5% to 9% for low earners from September.
The data comes from a recent report from the Institute for Fiscal Studies which predicts an interest rate “rollercoaster ride” for anyone who took out a student loan since 2012 and explains the causes behind the wild swings.
The projected rise for September would last for six months, and graduates with £50,000 debts could gain £2,200 to £3,000 in interest over the half-year period. The maximum rate is “likely” to fall to 7% in March 2023, and then fluctuate between 7% and 9% for a year and a half. It may fall as low as 0% in September 2024 and rise again to 5% in March.
The IFS said: “This interest rate rollercoaster will cause problems. The way the interest rate cap currently operates disadvantages borrowers with falling debt balances for no good reason. Sky-high interest rates may put some prospective students off going to university.
“Some graduates will likely feel compelled to pay off their loans even when this has no benefit for them.”
NEW: Graduates are in for a rollercoaster ride on student loan interest rates in the coming years.
Read our new briefing on what today's @ONS RPI figures mean for student loans, funded by @NuffieldFound> https://t.co/rILIVUkXHh pic.twitter.com/iqhj838kto
— Institute for Fiscal Studies (@TheIFS) April 13, 2022
The sharp climbs and drops are the result of how student loan interest is calculated with the Retail Price Index, an older measure of inflation, still used to measure the cost of living, rent, and wages.
Student loan interest is paid back between the current RPI rate and RPI plus an additional 3%, depending on a graduate’s earnings.
The RPI inflation rate sits at 9% for now, a reflection of the cost of living rise, higher than average UK mortgage rates (less than 3%), and explaining why student interest is so high.
Interest on student loans can go no higher than interest rates ‘prevailing on the market’ by law, which the Department of Education interprets as a cap matching the Prevailing Market Rate.
The upcoming 12% rise would go ahead despite a Prevailing Market Rate cap of 6%, due to a 6-month gap from when student interest exceeds the cap and when its actually reduced.
Ben Waltmann, senior research economist at the IFS, said: “Unless the government changes the way student loan interest is determined, there will be wild swings in the interest rate over the next three years.”
The full IFS report can be read here: https://ifs.org.uk/publications/16024
