The interest rate for English student loans will reach 12%

Interest rates on student loans for English and Welsh graduates are expected to hit 12% this autumn due to soaring inflation, increasing debts by thousands of pounds.

The Institute for Fiscal Studies (IFS) warned that the April 13 announcement that retail price index (RPI) inflation had reached 9% in March – the highest rate since 1991 – will have big impact on those who took out loans after the tariff changes in 2012.

Graduates of this promotion who earn over £49,130 ​​currently face interest rates of 4.5%, which will more than double by September, with the interest rate for the highest earners calculated by adding 3% to the RPI. Without a policy change, over six months this could add £3,000 to a £50,000 debt.

Low-income people – whose loans currently bear interest at 1.5% – will face a new rate of 9%, while those who received loans under the pre-2012 system will not be affected because their interest rate is linked to the base rate of the Bank of England. – currently 0.5% – instead of the RPI.

A cap that prevents interest on student loans from exceeding the average interest rate on unsecured commercial loans – known as the “prevailing market rate”, which was 6% in February – is expected to lower the rate from 12% to about 7%. by March 2023, predicts the IFS.

But he warned that the time needed to implement this cap will lead to “wild swings” over the next few years, with rates fluctuating from 0% to 9% until March 2025.

Ben Waltmann, senior research economist at IFS, said there was “no good economic reason” for the “roller coaster ride” graduates face.

“Interest rates on student loans should be low and stable, reflecting the government’s cost of borrowing,” he said. “The government must urgently adjust the operation of the interest rate ceiling to avoid a significant spike in September.”

The IFS said it would be impossible to implement an interest rate cap without delay, but the government should consider alternative policies as soon as possible. One suggestion is to cap student loan interest rates at the prevailing market rate starting four months before student loan interest is charged, which would likely result in less fluctuation.

Ministers have just three months to come up with an alternative system or risk deterring prospective students from going to university because of exorbitant interest rates, the think tank has warned. Under the new fee system announced after the Augar review, all graduates starting classes from September 2023 will only accrue interest at the RPI rate.

Hillary Gyebi-Ababio, vice president of the National Union of Students for Higher Education, said the inflation figures were “stark”.

“Raising the maximum interest rate on student loans to 12% will deter thousands of students from going to college and cause unprecedented uncertainty for the millions of graduates who are already repaying their loans with thousands of pounds added to their balance sheet,” she said. .

“The government must immediately commit to reversing these planned changes.”

A Department for Education spokeswoman said: “Unlike commercial loans, student loans are protected in a number of ways. Monthly student loan repayments are tied to income, not interest rates or amounts borrowed, and borrowers with income below the relevant repayment threshold do not repay at all.

“The IFS report makes it clear that changes in interest rates have a limited long-term impact on repayments, and the Office for Budget Responsibility predicts ROI to be below 3% in 2024.

“Anyway, the government has cut interest rates for new borrowers, so from 2023-24 graduates will never have to repay more than they borrowed in real terms.”

[email protected]

Bernadine J. Perkins