According to the Institute for Fiscal Studies, graduates will now have to pay up to 12% interest rate on student loans
The IFS has called the next few months a “roller coaster of interest rates” for UK students and graduates.
Leeds Labor MP Richard Burgon tweeted his disgust at the rapid rise, arguing it was time to talk about the student department delisting all together.
Interest rates on student loans will hit 12% in September.
The current situation cannot last any longer.
It’s time to not only eliminate college fees, but to have a serious national conversation about canceling student debt.
— Richard Burgon MP (@RichardBurgon) April 13, 2022
High-income graduates will incur ~£3,000 interest over six months
According to the IFS, the current retail price index (RPI) shows that unless policy changes are enacted, there will be significant changes:
- The maximum interest rate (charged with losing income of £49,130 or more) will drop from its current level of 4.5% to an excessive rate of 12% for six months.
- The interest rate for low-income people will drop from its current level of 1.4% to 9%
These figures reveal that on a typical loan balance of £50,000, a high-income graduate would incur around £3,000 in interest over just six months. That’s more than someone earning three times the median new grad salary would typically repay during that time.
Source: Office of Budget Responsibility; Department of Education; author’s calculations.
Modified rates expected to last until at least 2025
Depending on the student loan ceiling, the interest rate should then fall to around 7% in March 2023 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.
The combination of high inflation and an interest rate cap that takes about six months to come into place. Without the cap, the maximum interest rates would be 12% and continue through the 2022/23 academic year, and 13% in 2023/24.
Although interest rates affect loan balances for all borrowers, they only affect actual repayments for generally high-income graduates who will repay their loans.
The Potential Long-Term Problems With Student Loan Interest Rates
The extent of the impact that student loan interest rates will have on graduates is difficult to define at this time.
Because picking up my phone and seeing student loan interest go up, the same month our IR goes up, the same month our energy bills go up 54%, the same month inflation goes up 7%, the same month VAT in the hotel industry increases 20% pushed me to the limit
— MXM (@mxmsworld) April 13, 2022
Along with this, exorbitant interest rates may deter some prospective students from going to college. Some graduates will probably feel pressured to repay their loans, even if it is of no benefit to them.
