Graduates will save money as student loan interest rates drop again

Interest rates on student loans previously stood at 12%

The government is cutting interest on student loans for the second time amid the current cost of living crisis.

Interest rates on student loans had previously been reduced from 12% to 7.3%. In September, they will now stand at 6.3%.

The measure aims to protect graduates from rising inflation and save them some money.

But the Institute for Fiscal Studies said the changes do “nothing at all to protect current students from the rising cost of living” and will only benefit a minority of graduates.

According to the Department for Education, someone with an outstanding student loan balance of £45,000 will reduce the amount of interest they accrue each month by £210 from the old interest rates of 12%.

This is the largest reduction in student loan interest rates ever.

Universities Minister Andrea Jenkyns said: “We understand that many people are concerned about the impact of rising prices, and we want to reassure people that we are stepping in to provide support where we we can.

“For those starting higher education in September 2023, and all students considering this next step at the moment, we have reduced future interest rates so that no new graduate will ever have to repay more than what he borrowed in real terms.”

The Student Loan Company said borrowers need not do anything in light of the new changes, as they will be applied automatically.

However, it is not all good news.

Ben Waltmann, senior research economist at the Institute for Fiscal Studies, said The Guardian: “This is good news for graduates: recent graduates with a typical student loan balance will see around £100 less interest added to their balance in the first three months of the coming academic year compared to to the policy announced in June.

“However, only the minority of mostly high-income graduates who are ready to repay their loans in full will really benefit; refunds for most graduates will never be affected. And even graduates who repay in full generally won’t see their repayments drop for decades.

“Most importantly, it does nothing at all to protect current students from the rising cost of living. Simply due to errors in the inflation forecast, support for the cost of living for students is expected to hit its lowest level in at least seven years in the next academic year.

Featured Image: Shutterstock/ Algimantas Barzdzius

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Bernadine J. Perkins