Costly Loans to Hit Poorer Students in the UK
According to the Institute for Fiscal Studies, university graduates earning £27,295 or less will see their interest rates soar from the present 1.5% rate to nearly 9%.
Last month, it was reported that the retail price index (RPI), a measure of inflation used to calculate interest on student loans in England and Wales, reached a record 9%.
The maximum interest rate will increase from the current rate of 4.5% to 12% for graduates who are earning £49,130 or more. As such, the IFS reported that these graduates, with a typical loan balance of around £50,000 would be left with an additional £3,000 owed in debt.
Ben Waltmann, the IFS’s Senior Research Economist stated that “Unless the government changes the way student loan interest is determined, there will be wild swings in the interest rate over the next three years”.
It is highly likely that the maximum rate could reach up to 12% between September 2022 and February 2023.
Waltmann went on to add that “The government urgently needs to adjust the way the interest rate cap operates to avoid a significant spike in September”.
Student loans have operated now for a number of years. Many students working towards their current degrees do not actually realise that any interest is being charged during their course until they receive their first statement. This statement is only made available once they are graduates, a year after having left university.
The interest rates on student loans post-graduation are linked to pay and income. Only those earning below the £27,295 threshold are charged RPI. However, it is important to note that this group of earners do not make any repayments until they earn above that amount annually.
For those university students who will begin their degree courses from 2023 in England, the rate will be fixed at a lower level – at the rate of inflation.
Only last week did the IFS state that students who expect to earn more as graduates could save around £20,000 a year if they chose to delay starting university until the interest rate change comes into action.
The IFS further touched on the argument that these skyrocketed interest payments may further repel students from attending university.
The General Secretary of the UCU Union, Jo Grady argued that it was a “policy disaster” and that it “cannot be right to subject them [students] to the whims of volatile markets and rocketing interest rates.”
The UK’s Department for Education has argued that student loans are protected in number of ways, unlike commercial loans. A spokesman told the BBC that “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 that RPI will be below 3% in 2024.”
In response, the UK’s NUS President, Larissa Kennedy told the BBC that these “interest rate figures are still cruelly high, with many students having to turn to overdrafts and other types of loan products to see them through. While some graduates might breathe a sigh of relief that the interest rate is no longer in double figures, ministers should be prioritising providing urgent cost-of-living support here and now.”
Kennedy added that the UK Government “should introduce rent protections, offer basic levels of maintenance support and announce a cost-of-living payment for all students”.