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Students and graduates face 12% interest on student loans from September

·3-min read
student loans
Graduates in the current academic year pay RPI plus 4.5% on their student loans. Photo: PA

Students and graduates in England and Wales will pay up to 12% interest on student loans between September this year and March 2023, according to the Institute for Fiscal Studies (IFS).

The Retail Price Index (RPI) inflation in March, which is used to calculate the rate of inflation on loans for the coming academic year, reached 9% in March.

Those in the current academic year pay RPI plus 4.5%, which will now increase to 12%, the highest rate seen since tuition fees for university students in England were raised to £9,000 in 2012.

The think tank said the rise will mainly affect higher earning graduates as they are more likely to repay their loans in full, while those earning less will have their remaining balances wiped 30 years after graduation.

For graduates in the top-earning bracket, those paid £49,130 or more per year, inflation is typically adjusted each September at a rate of RPI plus up to 3%, leaving them with an additional £3,000 in debt.

"This means that with a typical loan balance of around £50,000, a high-earning recent graduate would incur around £3,000 in interest over six months, more than even someone earning three times the median salary for recent graduates would usually repay during that time," the IFS said.

Read more: UK inflation hits 30-year high of 7% as cost of living crisis deepens

A lower-earning graduate will see the interest rate jump from the current 1.5% to 9%.

IFS warned sky-high interest rates may encourage some soon-to-be students to take a gap year and delay attending university, and prompt graduates to pay off their loans even if this does not "benefit" them.

Dashed lines are based on Office for Budget Responsibility forecasts. Chart: IFS/OBR
Dashed lines are based on Office for Budget Responsibility forecasts. Chart: IFS/OBR

Ben Waltmann, senior research economist at IFS, said: "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.

"The maximum rate will reach an eye-watering level of 12% between September 2022 and February 2023 and a low of around zero between September 2024 and March 2025.

"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."

He called on the government to "urgently" adjust the way the interest rate cap works in order to "avoid a significant spike" in the Autumn.

The rocketing interest rates hike comes as students already face a hit by the government's "stealth tax" amid plans to freeze the repayment threshold for student loans.

In January, the Treasury said the salary threshold for student loan repayment in England would remain at £27,295 a year, £2,274 a month or £524 a week for the coming fiscal year, allowing it to rake in an extra £33bn from student loans over the next five years.

At the time the institute had warned that the move represented a "tax rise by stealth" on graduates earning middle incomes.

Read more: UK workers suffer sharpest fall in living standards since 2013 as real pay falls

Separate figures released on Tuesday showed real wages are lagging behind soaring inflation as living standards suffer the biggest drop since 2013. UK average earnings minus bonuses rose 4.1% versus 2021, but dropped 1.3% when adjusted for inflation, the sharpest fall since 2013, according to the Office for National Statistics.

Meanwhile, UK inflation jumped to a fresh 30-year high of 7% in the year to March, up from 6.2% in February. The Bank of England has predicted it could peak above 8% this month.

Watch: How long does it take to pay off a student loan?

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