Graduates in England and Wales who have taken out student loans since 2012 can expect the interest rates on them to soar, new analysis shows.
This will mean that thousands of students will be charged a higher rate of interest on their loans than homeowners paying off mortgages, thanks to rises in the Retail Price Index and the cost of living, reports the Independent.
According to recent analysis by the Institute for Fiscal Studies (IFS), due to current RPI inflation rates, the maximum interest rate on loans which is paid by those earning £49,130 or more, is set to rise from 4.5% to an ‘eye-watering’ 12% for half a year, while rates for low earners are set to rise from 1.5% to 9%
In real terms, this means a high-earning recent graduate with a typical loan balance of £50,000 would incur £3,000 in interest over just six months.
The IFS said that the maximum student loan rate should then fall to around 7% in March 2023, fluctuating between 7% and 9% until
September 2024, when it is predicted to fall to around 0% before rising again to around 5% in March 2025.
“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,” the IFS said, adding that without the cap, maximum rates would be 12% during the 2022/23 academic year, and around 13% in 2023/24.
There are concerns the ‘eye-watering’ rates will put students off going to university, or push graduates to pay off loans when this would have no financial benefit for them.
“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.”
Ben Waltmann, senior research economist at the 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.
“The Government urgently needs to adjust the way the interest rate cap operates to avoid a significant spike in September.”