Student loans taken out after 2012 will face increased interest rates

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Did you take out your student loan after 2012? If so, you will be one of the millions of students now facing increased interest rates due to Brexit’s effect on the value of the pound.

In 2016, the government’s retroactive changes to the student loan system saw the repayment threshold frozen at £21,000. This news was hotly contested by students. A petition received over 134,000 signatures. However, unlike the 2016 changes to the student loan system, the news that interest rates have increased has not yet been met with the same contestation.

This is due in part to the confusing nature of student loan interest rates. Unlike loans taken out before 2012, post-2012 interest rates are tied to the retail price index (RPI). Interest is calculated by adding 3% to RPI. Because post-2012 student loan interest rates were always tied to RPI, the government haven’t actually changed anything. However, the effects of fluctuating RPI will have substantial effects for many students.

RPI has increased from 0.9% in 2015, to 1.6% in 2016, and now stands at a higher rate of 3.1% in 2017. For a student at Cambridge or Anglia Ruskin, who will pay £27750 in tuition fees alone, the effects will be significant. In 2015, interest rates were 3.9% (calculated by adding 3% to the RPI rate of 0.9%). Over a ten year period, if RPI were to remain constant, this would mean a student would accrue £13,235 interest on their loan. Contrast this with the 2017 interest rates (6.1%) and you see the difference: a student would accrue £23,319 interest at the current rate on their loan, meaning they will owe over £10,000 more than they would if tied to the 2015 rate.  

It’s worth noting that RPI fluctuates, so when this goes down, so will interest rates. However, loans taken out before 2012 included a clause that ties interest rates either to RPI or to the Bank of England’s base rate depending on whichever is lower. Loans taken out after 2012 do not include this clause, making them subject to a greater hike in interest rates when RPI goes up, as it has done recently in the wake of the Brexit vote. As Daniel Zeichner MP points out, the current interest rates on post 2012 loans will mean many students “could be paying more than 24 times the Bank of England’s base rate in interest”.

In addition, RPI tends to be higher than the Consumer Price Index (CPI) rate levied on many commercial loans, which currently stands at 2.3%. This means that, while many commercial borrowers are enjoying lower interest rates on loans from high street banks, students face a surge in interest rates.

Zeichner said: “The news is not just bad for new and current students but also for graduates paying off their loans.”. While student loans are meant to offer a low-interest way of financing tuition fees, fluctuations in RPI mean that these loans are now, in many cases, worse value than high street loans. High street banks are currently offering personal loans with rates from 2.8% and fixed-rate mortgages for five years can start at 1.29%.

As Zeichner points out, “Student loans are now becoming so unaffordable that many graduates will not pay off their debts before they are cancelled by the Government after thirty years, making the announced increase terrible economics”.

The government says that student loans will not pay back any interest until they are in high earning positions, and after 30 years, student loan debts will be wiped. Yet if many students will not be able to afford to pay back accrued interest, this raises questions about the government’s economic rationale behind the student loan system.

 

This article was edited 18/04/17

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