Roar editor Emma Fallside on a recent report on the rising student loan interest rates starting in Septemeber 2022. How could this report impact students at King’s?
On Wednesday, 13th of April, the Institute for Fiscal Studies (IFS) released a report on the high inflation this year in the UK, and what the consequences for student loans may be. The report is based on the institute’s reading of the UK’s Retail Price Index, which is a measure of inflation calculated and published by the Office of National Statistics.
The finding basically reports that interest rates are currently set to rise from their current level of 1.5-9% to 4.5-12% by September 2022. The BBC calls these the highest rates since tuition fees in England were raised to £9,000 in 2012.
What exactly does this mean for student loans? What many people don’t realise when they first start taking out loans is that interest is charged every year even while you are in university – you just don’t have to start paying it back while studying. But, anyone who has taken out a student loan since 2012 is subject to an annual interest charge on their loan. The way that this interest is calculated is based on rates of inflation, which is measured using the Retail Price Index (RPI). But, there is usually a lag of six months or so in between when inflation is measured and when it is actually reflected in interest rates. So, the high inflation rates which the UK has seen in the past year will be reflected in loans covering the next academic year (2022-23).
Different income levels incur different interst rates on student loans. High earners who make over £49,130 a year are set to see a rise from 4.5% interest to 12% interest. The minimum income threshold to start repaying student loans is currently set at £27,295 a year. Those whose income sits at this threshold are set to see an interest rise from 1.5% to 9%. However, an added government policy is lowering the minimum income to pay back loans from £27,295 to £25,000 a year, which will take effect for student enrolling from 2023-24 onwards.
These numbers do not seem reassuring to current students relying on loans. With the rising rates, an average loan of £50,000 would incur £3,000 in interest over six months for high earners, and £2,250 over six months for low earners. Last year, the rates would have incurred £1,125 for high earners and £375 for low earners over the same six month period.
Luckily, the interest rate situation is not actually as bad as it seems. There is actually legislation in place in order to stop student loan interest from increasing above market interest rates. Currently the IFS has put that number at around 6-7%. So, why are interest rates rising?
The reason is because of that six month delay in between when inflation rates are calculated and interest rates are set. So, by March 2023 loan interest should be capped at 6-7% maximum interest, bringing it down from the scary 12%. So, although student loans will incur much higher interest from September 2022-March 2023, in the long run this won’t have too much of an impact on loan payments themselves.
The two main problems which the IFS warns students of are: 1. To not let the high interest on student loans deter potential incoming university students and 2. That graduates who may be planning on repaying the rest of their loan this year should not dip into their savings to do so, as interest rates will go back down.
Ultimately, loan repayments and interest contain a number of complexities which students often times are not made aware of. Until new policy is introduced to protect against extreme swings like this one, interest rates will likely be oscillating for the next few years. While in the long term these swings are unlikely to cause drastic change in loan repayments, it is important for students to be aware of how government policy may impact their loans.
