- Carl Court / Getty
LONDON – Rapidly rising inflation has pushed interest rates on many student loans above 6% from Friday, meaning that most new students will incur more than £5,000 of interest payments before they even leave university.
Student loans used to have relatively cheap interest rates, pegged either to retail price inflation (RPI) or the Bank of England base rate plus 1%.
Since 2012, however, interest has been charged at an eye-watering 3% plus RPI, which has been rampant since the Brexit vote. That means that student interest rates, which from today are being tied to March’s 3.1% inflation figure, are hitting students hard.
Coupled with the fact that the government in 2012 raised a cap on tuition fees from £3,225 to £9,000, it means students are facing higher fees than ever before.
Here are the key facts:
- Higher interest rates and bigger fees mean student debt rose above £100 billion for the first time in June; The Institute for Fiscal Studies (IFS) estimates students enrolling this year could run up to £5,800 of interest charges in a three-year degree, assuming they take out the maximum tuition fee loan and the maximum non-means tested maintenance grant; Average debt on graduation in 2017 was £50,800, according to IFS figures, compared to £44,000 in 2016, driven by interest rate hikes. In Scotland, the student interest rate remains 1.25%.
How will loans be paid back?
After they leave, students will pay 9% of everything they earn above £21,000, until they reach their early fifties, at which point the debt will be erased.
In many cases, graduates will hardly make a dent in their debt levels before they reach that stage: The IFS estimates 70% of students will never repay their loans.
No government shift
The government has confirmed it will not shift on plans to hike student loan interest. Some MPs were reported to support a change, but the Department for Education and the Student Loans Company confirmed the increase earlier in August.
The Department for Education told the BBC “borrowers will only ever pay back what they can afford.”