The Institute for Fiscal Studies said today’s reading of inflation means the maximum interest rate, which is charged to current students and graduates earning more than £49,130, will drop from the current level of 4 .5% to 12% for six months unless policy changes.
This would mean that with a typical loan balance of around £50,000, a recent high-income graduate would incur around £3,000 in interest over six months.
Interest rates for low-income earners would rise from 1.5% to 9%.
These would apply to English and Welsh graduates who have taken out a student loan since 2012.
The maximum interest rate on student loans should then fall to around 7% in March 2023, according to the IFS, and fluctuate between 7 and 9% for a year and a half; in September 2024, it is then expected to fall to around 0% before rising to around 5% in March 2025.
He says these “wild swings” in interest rates will come from the combination of high inflation and the fact that an interest rate cap takes six months to kick in.
The high inflation rate reflects the huge rise in the cost of living over the past year, but the IFS questioned why the rate was significantly higher than average mortgage rates, but also higher than many types unsecured loans.
An IFS spokesperson said: ‘Student loan borrowers might legitimately ask why the government is charging them higher interest rates than those offered by private lenders.’
While high interest rates are expected to come into effect in September, under the current system there would be a six-month lag between rates above the cap and the rate actually reduced.
This way of implementing the repayment cap would generally benefit those whose loan balances increase over time, while borrowers whose balances decrease over time will generally lose out.
According to Save the Student, those who started college between 1998 and 2011 will likely see their interest rate stay at 1.5%, as it’s calculated on the lower of the Bank’s base rate. England plus 1% or the RPI.
Tom Allingham, Managing Editor of Save the Student, said: “At a time when students and graduates are facing huge increases in the cost of living, today’s RPI announcement is a another blow.
If implemented, a maximum interest rate of 12% would massively exceed Plan 2’s previous high of 6.6% and represent an increase of almost three times the current maximum rate. For low-income people whose loans bear interest at the RPI rate only, using the March figure would mean that by next September their interest rate will be six times higher than it is now.
“It should be noted that because graduates only repay a percentage of their earnings above a certain threshold, any change in the interest rate will not affect how much people repay each month. However, higher interest rates mean larger overall debts, which means the loan takes longer to repay for those who might otherwise have done so sooner.
“Another important factor is that when the government determines that the interest rate on Plan 2 student loans is higher than that of comparable commercial unsecured loans, it can and will cap it at what it calls the rate. of the current market. They have done so for the past year, but the decision affecting this new RPI rate will not be made until August, leaving months of uncertainty in between.
“Unfortunately, the government also failed to answer some of our key questions that would have helped us inform young borrowers of the exact possible outcomes. We strongly encourage them to issue clear guidelines as soon as possible to reassure students and graduates that their loans will not come with record interest rates.