The interest rates on student loans are going up. According to the Institute for Fiscal Studies (IFS – an economic research organisation based in London), high inflation is going to cause a “rollercoaster” for the interest rates for English and Welsh graduates who took out a student loan after 2012.
This is because of two things: firstly, changes made by the government – announced in the spring statement – to the way that student loan repayments work and, secondly, rising inflation.
‘Inflation’ is a term used to describe what happens when the price of stuff goes up and reduces the purchasing power of your money. For instance, your weekly shop is suddenly £45 instead of £23 but the items in your basket haven’t changed.
By now, you’re probably hearing newsreaders say the phrase ‘cost of living’ in your sleep. But do you have a sense of what it actually means for you? A quick glance at your monthly outgoings – which will have gone up recently – and now your student loan statement tells you all you need to know.
Cost of living. These three words have become convenient and rather nebulous shorthand for the most extreme rise in the cost of essentials seen in generations because of rising inflation.
UK inflation has risen to 7% this month, according to the Office for National Statistics (ONS). That’s the highest it has been for 30 years. It is being pushed up by surges in the price of fuel, energy and food, which is putting an ever greater pressure on ordinary people’s household budgets. The phrase ‘cost of living’ hardly does justice to the impact of this social and economic crisis. Similarly, these words are not enough when trying to explain what is about to happen to student loans for those affected.
Recent graduates in England and Wales who earn less than £49,130 and were being charged 1.5% interest will be charged 9% interest from September. Those who earn more will go from paying 4.5% to 12%.
If you took out a student loan after 2012, the interest rate on that loan is based on something known as the retail price index (RPI). This is the variation in cost of retail goods like food, clothes and furniture.
Because RPI went up in March, recent graduates in England and Wales who earn less than £49,130 and were being charged 1.5% interest will be charged 9% interest from September.
For current students and graduates who go on to earn more than £49,130, the maximum interest rate that they can be charged will go up from its current level of 4.5% to what the IFS calls an “eye-watering” 12%.
According to IFS calculations, this means that with a typical student loan balance of around £50,000, a high-earning recent graduate would incur around £3,000 in interest over six months.
To put that figure in context, it is more than someone earning three times the average salary for recent graduates would usually repay during the same time period.
As I’ve previously reported, we ought to think of student loan repayments as a graduate income tax. Graduates who incur high amounts of interest during this period of inflation will have more to pay off in the long run.
This matters. Take my own situation, for instance. I did not go to university after 2012 so I won’t be affected by this particular interest rate hike but, more than a decade after graduating, I am still nowhere near paying off my student loan and my monthly repayments are now in excess of £200. If I were impacted by this hike, the amount I have to pay would go up. This change will effectively saddle affected graduates with more debt for longer.
Interest rates on student loans should be low and stable.
Ben Waltmann, INSTITUTE FOR FISCAL STUDIES
The IFS is calling on the government to take urgent action. Ben Waltmann is one of the institute’s senior research economists. He 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 maximum rate will reach an eye-watering level of 12% between September 2022 and February 2023.”
Waltmann added that there is “no good economic reason for this”.
In theory, student loans are supposed to be protected by an interest rate cap to stop a situation like this from happening. However, there is a problem with the way that cap functions. Because there is always a delay in the way that interest rates are recorded by the Bank of England, and the Department for Education applies their cap every three months and not every month, there is effectively going to be a six-month lag between student loan interest rates exceeding the cap and student loan interest rates actually being reduced, which is why the rise to 12% will happen unless something is done to stop it.
None of this is inevitable. In fact, experts – including the Office for National Statistics itself – have long argued that RPI is a bad measure of inflation and should not be used in public policy. Perhaps now would be a good time for the government to look at how it is used when it comes to student loans.
“Interest rates on student loans should be low and stable,” Waltmann continued. “The government urgently needs to adjust the way the interest rate cap operates to avoid a significant spike in September.”
Refinery29 has asked the Department for Education to comment on the situation.
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