Student loan interest rate hits 4.4% – how do I pay it back?
3) How the interest rate works
Interest starts accumulating when you first take out the loan, so your debt accumulates throughout college. While you’re studying, interest is 4.4%, higher than most mortgages.
The interest rate operates on a sliding scale. For “Plan 2” loans – those taken out by English and Welsh students since 2012 – it ranges from the retail price index, or RPI, based on the March figure, which was 1.5%, to the RPI plus 3 percentage points.
The scale is dictated by income. Those earning below the Reimbursement Income Threshold, £27,295 for current graduates, will only be charged at the RPI. After this point, the interest rate will steadily increase. Once a graduate earns more than £49,130 they are capped at RPI plus 3 percentage points.
In December 2021, the RPI was 7.5%. If that remains at the same level until March, in September students could face interest rates above 10%.
On “Plan 1” student loans, available to students in Scotland and Northern Ireland, you also pay 9% on anything you earn over the threshold. This is currently £19,895 a year before tax.
The interest rate applied is either the retail price index or the Bank of England discount rate plus 1 percentage point, whichever is lower.
4) The interest rate can be important
Someone with £60,000 debt and a low salary is unlikely to pay off their loan within 30 years, regardless of the interest rate. For these people, the reimbursement rate and threshold are the main areas of concern.
However, this does not apply to everyone. If you’re likely to pay off your loan within 30 years, the variable interest rate could significantly increase the time it takes to pay it off, increasing the total cost of debt.
5) Student debt can impact getting a mortgage
Your student debt won’t affect your credit score, but mortgage lenders must factor your student loan repayments into their affordability tests.
This means that student debt could negatively affect your ability to buy a home.
6) Advance Payments Could Save Thousands of Dollars or Cost Thousands of Dollars
If you plan to pay off your loan and make early payments, it could save you thousands of dollars due to the reduced amount of interest incurred.
However, if you are unlikely to pay it back and make additional payments, you will be throwing money away.
The difficulty lies in the fact that no one knows exactly how much he will earn during his career, or what the future changes to the loan system will be.
Graduates from low-income careers are unlikely to repay the full amount before it is written off after 30 years, so they or their families would lose out by paying upfront.
For high-income earners, however, the savings from paying tuition upfront could be substantial.
Take a graduate who gets a job with a starting salary of £35,000, increasing each year by 5%. The maximum annual tuition plus maintenance loans would cost £62,766 paid on graduation, compared to a gradual repayment of £122,170 in current money over 30 years, or some £59,404 more.