Students and graduates to pay interest of 5.5%

Last week’s inflation announcements have an important implication for students.

The interest rate for student loans for the academic year is 3% higher than the increase in the RPI for the year to the previous April.

So, the announcement that RPI had increased by 2.3% over the last year means that students will have interest of 5.5% per year added to their loans from September.

This means that the interest added to a typical £40,000 student loan will be £2,200 for the year starting in September 2019.

A graduate earning £50,169 with an outstanding loan of £40,000 will have £2,200 deducted from their pay in 2019/20, which will simply pay the interest on the loan.

A graduate earning less than, with the same loan balance, will see the balances increase, whilst those earning more will pay more but reduce the balance.

The inflation figures are, however, good news as the interest rate for the loans will reduce from the current 6.3%, so graduates and student will be paying less interest than they have been.

However, the interest payable on student loans remains high compared to other forms of finance.

It seems particularly unfair to continue to link the interest rate to RPI, when the government uses CPI (which is usually lower) for benefits and National Savings.