Confused by Student Loan Interest Rates Going Up? Here's an Explainer

Like many other university students or graduates, you may have seen the recent news about how students in England and Wales could see a massive spike in their loan repayments over the next six months. 

According to the latest analysis by the Institute for Fiscal Studies, the maximum interest rate charged to current students and graduates earning more than £49,130 will rise from 4.5 percent to a depressing 12 percent – unless further policy changes are made. For lower earners, interest rates will rise from 1.5 percent to 9 percent in the same period.

Terrifying? Confusing? Yep, we know how you feel. Let’s break down exactly what these potential changes might mean for you and your bank balance. 

First off: Student loan interest is capped by law, which means it isn’t allowed to rise above interest rates “prevailing on the market”, as the financial parlance goes. According to the IFS, the latest prevailing market rate for February is 6 percent. 

However, there’s a six month lag between loan interest rates exceeding the cap and the interest rate actually being reduced by the Department of Education. That means that the uncapped rate will apply between September 2022 and February 2023 – hence, those scary news stories. 

The IFS also said that from March 2023, the maximum student loan interest rate is likely to fluctuate between 7 and 9 percent for a year and a half before plummeting to around 0 percent in September 2024. 

Dubbed the “interest rate rollercoaster”, the IFS has warned that these interest rates may put some students off going to university if the government fails to intervene. It could also force some graduates into paying off huge sums of debt when it “has no benefit for them”. 

The key word in all this is “forecasts”. The ISF bases these predictions on its readings of the Retail Prices Index (RPI) from the Office for National Statistics, which measures inflation between March 2021 and March 2022. This is then applied to student loans interest rates in the 2022/23 academic year.

It’s still unclear yet whether the forecasts made by the ISF will happen, as the government may very well decide to intervene first. On April 14th, Michelle Donelan, Minister of State for Higher Education, tweeted that she was “aware of some of the claims being made in the press about Plan 2 and Plan 3 student loan repayments”.

(Plan 2 student loans, for the record, include anyone who took out an undergraduate loan, Level 4/5 and/or a PGCE course beginning in or after September 2012. Plan 3 loans are for postgraduates only.) 

She added: “The interest rate on student loans has no impact on monthly repayments. These will not increase for students. Repayments are linked to income, not interest rates.

“Going to university is an amazing opportunity that helps students from all walks of life progress with their chosen future and so it is important we tackle these myths.”

We spoke to Ben Waltmann, the senior research economist who wrote the Institute for Fiscal Studies report for his thoughts on Donelan’s tweets and whether they will impact student loan interest rates.

“The government’s apparent willingness to fix the interest rate cap is welcome,” he told VICE. “As I pointed out in my original briefing, current policy is flawed, so it is good to hear that the government is considering the issue.”

Waltmann added that the comments made by the minister that interest rates on student loans have no impact on monthly repayments is “not wrong but misleading”.

“Students currently at university and those making repayments who started university since 2012 will see their loan balance increase by more in cash terms over the next academic year,” he told VICE.

“It is true that the interest rate on student loans has no impact on monthly repayments for those who are still repaying their loans,” he explains. “However, it does affect how long those who do pay off their loans before the end of the repayment period have to make repayments and therefore the total amount these students repay over their lifetimes.”

Let’s break that down: In the next six months, if you’re a student who has started university since 2012 you will see your student loan balance increase in cash terms. However, your monthly repayment will not be affected as it is linked to your salary and not to interest rates. You won’t be paying more of it back during the period of high inflation – but it is possible you will be paying off your debts for longer as a result, and so the total amount you spend on repayments could be higher.

That doesn’t mean that everyone needs to live in fear of eventually paying off a huge sum of money. Remember, your debt is written off after 30 years – regardless of how much or how little you’ve paid off. 

“This will only ever matter for repayments for borrowers who pay off their loans in full,” Waltmann says reassuringly. “With current policy and forecasts, this looks likely to be a minority – around one-third – of typically high-earning borrowers.

“Everyone else’s repayments will be totally unaffected.”

Waltmann added that those currently looking to get into uni will be less affected by the spike in interest rates. Given the recent announcements, however, they may be deterred from applying in the first place.

“Judging by current forecasts, prospective students will be less affected, partly because the system will change from the 2023 entry cohort, but mostly because their balances will still be quite low by the time the period of high-interest rates comes to an end. 

“The biggest concerns are that prospective students could be put off from university by high-interest rates or that graduates may spend large sums on repayments that will never benefit them.”

In other words, students who have just started university in the 2022/23 academic year will not see much change in their student loan balance. That’s because the current policy will only apply to a relatively small amount of their debt. 

This isn’t the first time this year university students have feared for their wallets. In February, it was reported that new government proposals to “level up” higher education could mean that pupils who fail their Maths and English GCSE are no longer allowed to take out student loans.

The government also announced that students who enrol from September 2023 will have to start paying back their loans once they earn £25,000 instead of £27,000 and that they will have to make repayments for 40 years, rather than 30 under the current system. 

Larissa Kennedy, President of the National Union of Students UK, says that if interest rates on student loans continue to rise, more people from underprivileged backgrounds will be excluded from higher education.

"The government's changes to student loans are calculated cruelness,” she told VICE. 

“At a time where the cost of living is soaring and real earnings are crashing, for the more vulnerable, these classist changes could be the difference between heating and eating. 

“The minister is saddling young people with unimaginable debt for the next 40 years of their lives. This is nothing more than an attack on opportunity.”

It seems that all these announcements have one thing in common: Students who want to take out a loan should be prepared to pay it back for a very, very long time. 

@darceyedkins