From September 2022, there will be additional interest reductions on student loans to protect borrowers against rising inflation rates
For those on Plan 2 (undergraduate) and Plan 3 (postgraduate) student loans, student loan interest is to be capped at 6.3%, after the government intervened in June in response to the rise in the RPI rate.
Due to domestic economic pressures, such as the energy crisis and rising inflation in the UK, student borrowers faced a 12% interest rate in September.
Monthly student loan repayments are based on income rather than interest rates or the amount borrowed. Unlike commercial loans, repayments will stop for all borrowers who earn below the relevant repayment threshold.
By how much has the interest limit been reduced?
Setting an interest rate of 6.3% instead of 12% will lower student loan interest rates by the highest amount ever.
This implies that a borrower with a student loan balance of £45,000 would reduce their accrued interest by around £210 per month compared to interest rates of, say, 12%.
It is on the total value of the loan, as the monthly repayments do not change. The government subsequently used expected market rates to lower the interest rate ceiling to a maximum of 7.3%.
“We have reduced future interest rates so that no new graduate will ever have to repay more than they borrowed in real terms.”
Further and Higher Skills Minister Andrea Jenkyns said: ‘We understand that many people are concerned about the impact of rising prices and we want to reassure people that we are stepping in to provide a support where we can.
“In June, we used expected market rates to anticipate the announcement of a cap on student loan interest rates from the expected 12% and are now reducing the interest rate on student loans to 6.3%, the rate applicable today, to align with the most recent data on market rates.
“For those starting graduate school in September 2023 and all students considering this next step at the moment, we have reduced future interest rates so that no new graduate will ever have to pay back more than what he borrowed in real terms.”
What is the government doing to support low-income households?
To further combat rising inflation, the government is providing support to households to help those struggling to increase their income to cover basic needs.
The funding is expected to provide eight million of the most vulnerable households with an additional £1,200 in aid this year, with all domestic electricity customers receiving at least £400.
The National Insurance contribution threshold was also raised in July 2022, giving workers a tax cut of up to £330 a year. Finally, many low-income households have received the first payment of their cost-of-living allowance.