English and Welsh graduates who have taken out student loans since 2012 can expect a “rollercoaster ride” when it comes to interest rates, new analysis shows.
This will mean students are charged higher rates of interest on their loans than homeowners paying off mortgages.
The Institute for Fiscal Studies (IFS) has calculated that because of current RPI inflation rates, the maximum interest rate on loans – paid by those earning £49,130 or more – will rise from current rates of 4.5% to an “eye-watering” 12% for half a year.
The IFS said that interest rates for low earners are set to rise from 1.5% to 9%.
University and College Union general secretary Jo Grady said: “It simply cannot be right to saddle students with tens of thousands of pounds worth of debt and then subject them to the whims of volatile markets and rocketing interest rates.
“Today’s news will leave those already repaying their student loans preparing for increased debt payments during a cost-of-living crisis and force others to consider whether a university education is worth the cost at all. On any level, this is a policy disaster.”
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What do the figures say?
The institute added that a high-earning recent graduate with a typical loan balance of £50,000 would incur £3,000 in interest over six months
An amount that is higher than a graduate earning three times the median salary for recent graduates.
The IFS said that the maximum student loan rate was then set to fall to around 7% in March 2023, fluctuating between 7% and 9% for a year and a half.
The IFS said: “In September 2024, it is then predicted to fall to around 0% before rising again to around 5% in March 2025,” the IFS said.
“These wild swings in interest rates will arise from the combination of high inflation and an interest rate cap that takes half a year to come into operation,"
And, without the rate cap, maximum rates would be 12% during the 2022/23 academic year, rising to around 13% in 2023/24.
It said that the “interest rate rollercoaster” would cause problems, as the interest rate cap disadvantages students with falling debt balances.
It could also put students off from going to university or push graduates to pay off loans when this would have no financial benefit for them.
Linked to cost of living crisis
The “eye-watering” rises have been linked to the Retail Price Index and a rise in the cost of living.
For borrowers who started university from 2012 onwards, interest on their student loans is normally linked to the Retail Prices Index (RPI).
Interest rates on student loans are usually charged between the RPI inflation rate and the RPI inflation rate plus 3%.
But, there is a lag between the RPI inflation rate and student loan interest rates.
The IFS calculates this means current high inflation rates will force a hike in student loan interest rates for 2022/23.
“This high reading implies an eye-watering increase in student loan interest rates to between 9% and 12%,” the IFS said.
“That is not only vastly more than average mortgage rates, but also more than many types of unsecured credit. Student loan borrowers might legitimately ask why the Government is charging them higher interest rates than private lenders are offering,” they added.
Who will get hit the hardest?
While student loan interest rates are not supposed to rise above market interest rates, the lags between when the market interest rate is measured and the DfE taking action mean that between September 2022 and February 2023, students will pay uncapped rates.
The situation is likely to disadvantage higher-earning graduates.
Borrowers whose debt is falling over time will be charged more than those whose debts are rising.
The IFS said this would lead to “unfortunate redistribution” between graduates.
Ben Waltmann, senior research economist at the IFS, said: “There is no good economic reason for this. Interest rates on student loans should be low and stable, reflecting the Government’s own cost of borrowing."
Shadow education secretary Bridget Phillipson added: “The cost-of-living crisis, made worse in Downing Street, is hitting people hard.
“As working graduates battle rising prices and the Chancellor’s growing tax burden, soaring interest rates risk piling on more pressure.”
A Department for Education spokesperson said: “Unlike commercial loans, student loans are protected in a number of ways.
“Monthly repayments for student loans are linked to income not to interest rates, or the amounts borrowed, and borrowers earning below the relevant repayment threshold make no repayments at all.
“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 predict that RPI will be below 3% in 2024.
“Regardless, the Government has cut interest rates for new borrowers so from 2023/24, graduates will never have to pay back more than they borrowed in real terms.”