The Huge Rise in Student Loan Interest Rates Explained

Graduates in Wales and England are set to be hit by a ‘sharp’ 12% rise in interest rates on their student loans. The increase applies to loans taken out since 2012 and will cost graduates an additional £2,200 to £3,000 between September this year and March 2023 depending on their income, the Institute for Tax Studies has calculated.

Interest rates on student loans taken out since 2012 are based on the retail price index plus 3%, with the 9% rise in the RPI in March meaning it will rise from the current interest rate of 1.5 % to 12% for the highest paid graduates. September, said the IFS. Interest rates for graduates earning less than £49,000 a year are set to rise from 1.5% to 9%.

A NUS spokesperson estimated that recent graduates over £49,000 would pay £3,000 in interest on a balance of £50,000 over six months from September 2022 to March 2023. Recent graduates earning less than £49,000 £ will see interest rates on their student loans rise from the current 1.5% to 9%, resulting in around £2,300 in interest over the same period.

Changes to the repayment of student loans will come into effect from 2023-2024. You can read advice on this from financial expert Martin Lewis here.

A Welsh Government spokesman said: “I can confirm that the situation is exactly the same for Welsh (student loan) borrowers. Welsh and English borrowers benefit from the same loan conditions.

NUS Wales chair Becky Ricketts has warned that the increase will discourage young people from less affluent backgrounds from going to university.

“These numbers are brutal. By raising the maximum interest rate on student loans to 12%, the British government is discouraging the most disadvantaged students from going to university. It will also cause great uncertainty for the millions of graduates who are already repaying their loans amid a cost of living crisis.

“This is another example of a decision being made in Westminster that the Welsh Government can do nothing about. Education is meant to be a devolved to Wales, but many decisions that impact the lives of students and graduates are still in the hands of ministers in England.

“Wales has a history of progressive education policy, but the Welsh Government must seek the powers to do things radically differently to lead Westminster and implement a system that puts people above profit and definitively eliminates the commodification of education.”

Jo Grady, general secretary of the university staff union, the UCU, it was not fair to indebt students with tens of thousands of pounds of debt and then “subject them to the vagaries of market volatility and rising interest rates”.

How Student Loan Interest Works

Interest rates on student loans are tied to graduate earnings. Graduates of £49,000 or more pay interest at RPI plus 3%. Those earning £27,295 or less are charged at RPI, although they won’t be reimbursed until they earn more than £27,295.

A NUS spokesperson said recent graduates on more than £49,000 will pay £3,000 interest on a balance of £50,000 over six months from September 2022 to March 2023. Recent graduates earning less than £49,000 £ will see interest rates on their student loans rise from the current 1.5% to 9%, resulting in around £2,300 in interest over the same period.

How the situation will change in March 2023

The latest major interest rate hike will only affect graduates for six months, as a new legal limit comes into effect from March 2023. Under the new law, interest charged on student loans cannot be higher than on unsecured commercial loans that can be taken out on the high street. .

The Institute of Fiscal Studies said that current estimates are for interest to fall back to around 7% in March 2023. Fluctuations in coming years mean the latest interest rate hike may not make a difference. large overall difference in the total amount paid by graduates. over time for their loans, say some commentators.

But the IFS has warned that the current huge increase could deter potential students who do not understand the complicated and uncertain system of student loans. The NUS and IFS said the government could modify student loans to stop such “wild swings” in interest rates.

The IFS said in a statement: “The maximum rate will reach a breathtaking 12% between September 2022 and February 2023 and a minimum of around zero between September 2024 and March 2025.”

A NUS spokesperson said: “The government can change that. It is within their power to change the way interest is calculated for student loans, but they are unlikely to do so. The government pushed the financial hardship onto the young people.

Why it might not be a good idea to take a gap year in 2022-23

Starting in the 2023-24 academic year, university graduates will repay their student loans over 40 years instead of 30. Currently, any outstanding loans are forfeited after 30 years. The extension means graduates will pay thousands more and some will still pay them into their 60s, commentators have warned.

Meanwhile, from 2023-24 graduates will start repaying their student loans once they have earned £25,000 instead of the current £27,000.

The UK government has said student funding will be ‘put on a more sustainable footing’ and wants to ensure more students repay their loans in full.

The new changes will not be backdated for former graduates or students who began their undergraduate studies before September 2023.

The annual tuition fee in Wales is £9,000. In England they are £9,250 and must be frozen at that rate until September 2025.

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Stephen V. Lee