Why today's inflation figures are bad news for those with a student loan
While today’s inflation figures are good news for most Britons, they spell bad news for students.
Anyone with a student loan could be looking at paying interest of up to 6.3% on their debt come the autumn – that’s way, way over the Bank of England base rate of just 0.5%.
This is because the student loan rate is linked to the Retail Prices Index for March – and that hit 3.3% last month, 0.2% higher than March 2017.
MORE: Inflation dips to 12-month low after slower rise in clothing and footwear prices
The rise will take effect from September for students and graduates under the 2012 fee scheme.
Those starting or continuing at university this autumn will be charged interest of 6.3% – RPI at 3.3% plus 3% – from when they start studying, until the April after they graduate.
Once students start earning, the repayment interest rate is linked to how much they earn.
Government should not link these interest rates (or anything else) to the RPI – a measure of inflation which is overstated, which has had national statistics status withdrawn, and which is so flawed that the National Statistician has advised it should not be used. https://t.co/cLJ7HSzbfA
— Paul Johnson (@PJTheEconomist) April 18, 2018
Ministers announced earlier this month the threshold is to be raised from £21,000 to £25,000 – so until graduates will not pay back any interest until they start commanding a minimum salary.
The interest is on a sliding scale – from 3.3% up to the full 6.3% for the higher earners (over £45,000).
Will govt really let tuition fee interest rate go up to 6.3% in autumn on basis of today’s RPI? After all the huffing and puffing over the fee review presumably will want to intervene rather than let loan rates climb even higher?
— Sean Coughlan (@seanjcoughlan) April 18, 2018
Amatey Doku, vice president of the National Union of Students, said: “Interest rates at 6.3% represent an increase of 0.2%, which, although a seemingly small degree, adds to the huge psychological burden that debt has on many students and graduates.
“Absurdly high interest rates are only a small part of student debt problem – which already leaves students from disadvantaged backgrounds with up to £50,000 of debt, most of which is never paid off.”
Various commentators said linking student loans interest rates to RPI was a flawed system.
Paul Johnson, director of the influential Institute of Fiscal Studies thinktank, tweeted: “Government should not link these interest rates (or anything else) to the RPI – a measure of inflation which is overstated, which has had national statistics status withdrawn, and which is so flawed that the National Statistician has advised it should not be used.”
That inconvenient RPI rise …@educationgovuk about to confirm student loan rate rising to 6.3 pct from sept – yikes
— Rosemary Bennett (@RosieDBennett) April 18, 2018
A spokesman for the education department said the decision to raise the minimum repayment threshold for student loans to £25,000 is saving 600,000 graduates up to £360 per year from this month.
MORE: This university has slashed the cost of a degree to £5,650 a year
“This change in interest rate will make no impact on a borrowers’ monthly repayments and very few people are likely to be affected by the increase,” he said.
“Once the loans are in repayment, only borrowers earning over £45,000 are charged the maximum rate. This ensures that they make a fair contribution to the system.”
