According to the Institute for Fiscal Studies, interest rates on student loans are set to rise to as much as 12%, costing top-earning graduates an extra £3,000 unless the government intervenes.
Interest rates on post-2012 student loans are based on the retail price index, with the rise in the RPI in March meaning the most recent graduates in England and Wales will be charged 9% from September, up from the current rate of 1.5%.
The IFS analysis found that the highest earning graduates would be most directly affected by the increase, as they were more likely to pay off their entire loan within 30 years of graduation. Other graduates would see any outstanding balance wiped out after 30 years.
The highest earning graduates – those earning more than £49,130 a year – have to pay an extra three percentage points (compared to low earners) so interest rates on their loans will rise from 4.5% to 12 %. Those with student loans of £50,000 will rack up an additional £3,000 in debt until March 2023 when interest rates will be revised for the next time.
Ben Waltmann, senior research economist at IFS, said: “Unless the government changes the way interest on student loans is determined, there will be wild swings in the interest rate over the next three coming years.
“The maximum rate will reach a breathtaking 12% between September 2022 and February 2023 and a minimum 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 cost of borrowing. The government must urgently adjust the operation of the interest rate cap to avoid a significant spike in September.
The National Union of Students said the increases were “sharp” and likely to add thousands of pounds to graduate loans at a time when many were struggling.
“Students are not cash cows, and we cannot continue to bear the brunt of this government’s regressive actions that have left millions exposed to hardship,” said Hillary Gyebi-Ababio, Vice President of NUS for higher education, who wants the government to reverse the changes.
Bridget Phillipson, the shadow education secretary, said the increases were another symptom of the cost of living crisis.
“As working graduates struggle with rising prices and the chancellor’s growing tax burden, soaring interest rates are likely to increase the pressure,” she said.
A Department of Education spokesperson said student loans differed from commercial loans, with repayments being tied to income, not interest rates or amounts borrowed. They pointed out that borrowers who earned below the threshold of £27,275 a year before tax made no repayments.
“The IFS report clearly indicates that changes in interest rates have a limited long-term impact on repayments, and the Office for Budget Responsibility projects that the ROI will be below 3% in 2024,” said the holder. word of the DfE.
“Anyway, the government has cut interest rates for new borrowers, so from 2023-24 graduates will never have to repay more than they borrowed in real terms.”
The government’s recent student loans overhaul will extend payments to 40 years from 2023 from 30 and lower starting thresholds for repayments that could cost low- and middle-income graduates an additional £30,000 over the course of their life.
Students starting their courses in 2023 to 2024 and earning £50,000 or more will save around £20,000 compared to the current loan system due to lower interest rates.
Nick Hillman, director of the Higher Education Policy Institute, said: “One modest thing the government could do immediately to ease the situation would be to switch to a more respected measure of inflation.
“Four years ago the Office for National Statistics said the RPI was a poor measure of inflation and should not be used in public policy. Now would be a good time to re-examine its use for lending students.