Interest rates for graduates on a Plan B loan are expected to increase starting in September. A graduate is eligible for a Plan B loan if they started university in 2012 and after in England and Wales.
The new interest rate is higher than most mortgages and much higher than for students of previous cohorts. The interest rate depends on the repayment threshold – each year the threshold increases according to average incomes. However, the government announced in early 2022 that the threshold would be frozen at £27,295 for 2022-23. This means that university leavers will pay around £110 a year more than they would have if the threshold had been increased on the basis of income (4.6%).
What is the impact of the new interest rate on your current student loan? Here’s everything you need to know.
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What is the current student loan interest rate?
The interest rate depends on the income of the graduate. The Institute for Fiscal Studies (IFS) said rates could climb to 12% for top-earning graduates. A recent high-income graduate (from 2012) with a typical loan balance of £50,000 could pay £3,000 in interest over a six month period. Those with low incomes can see an increase of 1.5% to 9%.
The interest rate is calculated on the retail price index (RPI) inflation rate for March. The RPI figure confirmed on Wednesday sets the interest rate for the coming academic year, meaning it will rise from 4.5% this year to 12% from September 2022. Graduates earning £27,295 or less are charged RPI but they don’t make refunds until they earn above that amount each year. Graduates who earn more each year pay interest at RPI + 3%.
England and Wales postgraduate loans also carry interest at RPI + 3%.
When do you have to pay it back?
Don’t panic if you think you’ll never be able to repay your student loan because those with a Plan B loan stop paying 30 years from April after you graduate. Whether or not you have repaid a penny, your student loan will be erased.