Student loan interest rates on the up

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By Andy Mackay
Know Your Money Editor

For the last year, many graduates have been benefiting from smaller repayments on their student loans, as interest rates stood at zero per cent.

But that is now at an end, with the Student Loans Company confirming the zero rate has been scrapped and anyone who took out a loan since 1998 will now be charged 1.5 per cent.

For these graduates, interest is equivalent to the retail prices index (RPI) rate of inflation as it stood in March, or one per cent above the highest base rate of a group of nominated banks - whichever is lower.

RPI was 4.4 per cent in March, making this the highest amount that could be applied before August 31st 2011. For now, though, the base rate stands at 0.5 per cent - which is why we have the 1.5 per cent figure.

What does this mean for me?

According to independent university guide Push, the average student who started a course last year can expect to graduate with debts of over £23,000. While those who have already finished may not have amassed such a deficit, president of the National Union of Students Aaron Porter has suggested an increase in the Bank of England's base rate could cause major problems.

"That many students will be hit by hundreds being added to their debt at a time when youth unemployment is at nearly one million is further demonstration that the current system of funding is broken," he said.

Around three million people took out their student loans after 1998, but for more than 300,000 under the old system, the change this week is even more pronounced. Over the last 12 months a rate of -0.4 per cent has been place, but this will rise in line with inflation to 4.4 per cent.

How the repayments are calculated

While costs may be increasing, student loans still represent perhaps the cheapest form of borrowing available and repayments are determined in a way that is designed to make them affordable.

Nothing is paid back unless your earnings exceed a certain threshold - which for those on an annual salary is £15,000. So, if you are paid monthly, you won't service your loan unless your pay exceeds £1,250.

It's calculated for each pay period, meaning if a bonus or overtime shift takes you over the threshold in a given month, you will pay something back even if your salary for the entire year doesn't exceed the £15,000 level.

As for the cost itself, you repay nine per cent of the amount you earn above the threshold. For someone earning £1,750 gross per month, that means nine per cent of £500 - or £45.

Students face rising living costs

Of course, for the many students preparing to embark on a degree this month, the cost of living may be of even greater concern than student loans. The Association of Investment Companies recently surveyed parents and undergraduates and found many believe it is getting much harder to afford higher education, with 49 per cent of youngsters expecting it to take more than ten years to get out of the debt they amass at university.

Recent research by Santander revealed nearly half of those at university need a part-time job in order to fund their studies, with one in ten of these working 15 hours a week or more.

And many term-time workers said they feel their studies are being adversely affected - prompting the bank's Luis Juste to note: "At a time when they are busy adjusting to living away from home for the first time, many students find managing their finances a real challenge.

"While it's positive to see students being so industrious and gaining valuable experience in the workplace, it's concerning that a quarter of students who work part-time to help fund their education believe their studies are suffering as a result."

With the various pressures to consider, finding the right student bank account could be more important than ever for those about to begin the adventure - as overdraft limits, interest rates and introductory offers can vary greatly and have a major impact on financial planning.

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