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Student loan interest rates capped

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Students that are borrowing loans will be protected from rising inflation with further reduced interest rates. From September 2022, student loan interest rates in England and Wales will be capped at 6.3%.

Student loan Interest rates cut again

Plan 2 (undergraduate) and Plan 3 (Postgraduate) loans were due to rise from the current 4.5% to 7.3% maximum rate. After an intervention by ministers in June, the government said this action will further protect borrowers from the rising cost of living and global economic pressures which meant that students faced a 12% interest rate in September 2022.

Largest cut on record

By setting an interest rate of 6.3% as opposed to the expected 12%, student loan interest rates are set to be reduced by the largest amount on record. Minister for Skills, Further and Higher Andrea Jenkyns said: “We understand that many people are worried about the impact of rising prices and we want to reassure people that we are stepping up to provide support where we can.

Back in June, we used predicted market rates to bring forward the announcement of a cap on student loan interest rates down from an expected 12% and we are now reducing the interest rate on student loans further to 6.3%, the rate applying today, to align with the most recent data on market rates.

“For those starting higher education in September 2023 and any students considering that next step at the moment, we have cut future interest rates so that no new graduate will ever again have to pay back more than they have borrowed in real terms.”

What does this mean for students?

The Department for Education (DfE) announced that the new capped rate will mean a borrower with a student loan balance of £45,000 would reduce their accumulating interest by approximately £210 per month compared to 12% interest rates. This is on the total value of the loan.

Monthly student loan repayments are determined by income, as opposed to interest rates or the amount borrowed. Graduates pay 9% of their income above a repayment threshold of £27,295 a year, £2,274 a month, or £524 a week.

A spokesperson for the Student Loans Company said the change in interest rates would be automatically applied and customers don’t need to take action. Student loan interest rates will be reviewed again this December.

No protection for current students

The Institute for Fiscal Studies (IFS) welcomes the reduced cap, acknowledges the benefits for wealthy graduates but warns that the move will do nothing to protect current students from spiralling inflation.

Ben Waltmann, Senior Research Economist at IFS, said: “This is welcome news for graduates: recent graduates with a typical student loan balance will see about £100 less in interest added to their balance over the first three months of the coming academic year compared with the policy as announced in June.

“However, only the minority of mostly high-earning graduates set to pay off their loans in full will ever actually benefit from this; most graduates’ repayments will never be affected. And even graduates who do pay off in full will typically not see their repayments fall for decades yet.

“Importantly, this does nothing at all to protect current students from the rising cost of living. Merely because of errors in inflation forecasts, student living cost support is set to reach its lowest level for at least seven years in the coming academic year.

Final thought

While the DfE has reached a milestone by reducing the interest rates for student loans by the largest amount on record, the move fails to protect current students from the rising cost of living.

Annual increases in maintenance loans are predicted years in advance, and inflation has recently been significantly higher than previously predicted. As forecasting errors have left annual increases trailing behind inflation, the support for student living costs is at its lowest level for at least seven years in the coming academic year. Waltmann said: “Unless the government changes course, students from the poorest families will be at least £100 out of pocket a month.”

Photo Credit: tirachardz 

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