Student loan repayments on the increase

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By Mark Mitchell
Know Your Money Editor

Graduates are facing higher interest rates on student loans in the future following the latest rise in inflation. Those currently earning £15,000 or more may soon notice the money deducted from their monthly salary is increased.

What are the changes to student loan repayments?

There will be a change to the current situation where those still at university and graduates pay no interest and those who took out a loan prior to 1998 pay a negative rate of interest meaning they get money back.

Annual costs could see an increase of £240 on a typical £5,000 debt as rates jump as high as 4.4 per cent for some.

For the past 13 months the base rate has been 0.5 per cent and if it stays the same, students will pay a new rate of 1.5 per cent interest from September. However, a number of economists are forecasting at least one jump in the base rate before the end of the year.

Any increase to the base rate before September would lead to rises in the student loan rate.

This may have a large impact on people in the UK as figures show there are outstanding balances for approximately 3.3 million people who first took out a loan from 1998, while pre-1998 loan debts are owed by around 400,000 people.

In real terms this means that many graduates on low incomes will see their loans continue to grow even when they start making repayments, as the interest will be higher than their payments.

A graduate currently earning £18,000 a year would receive £1,500 gross a month, £250 over the repayment threshold of £1,250 a month. This means student loan repayments would be £22 a month (nine per cent of £250). However, at a rate of 1.5 per cent, they would be increased to £37.50 in interest each month.

The National Union of Students (NUS) has stated the system for repaying loans is in need of an overhaul.

Aaron Porter, NUS president-elect, said: "Clearly the rise is just further proof that the current system is not working. It is a bizarre system in which inflation in one month dictates interest rates over the whole year.

"We are asking for an urgent review to consider setting rates based on a 12-month cycle. The way that student interest is calculated makes it difficult to have any certainty in any given year."

However, these changes have yet to be formally confirmed and this needs to be done by the government, who have recently been focused on the general election.

What is the advice?

Despite the plans student loans remain the cheapest kind of loan available and with careful management repayment can prove easier.

Martin Lewis, the creator of MoneySavingExpert.com, suggests: "Much is still uncertain, so the best thing to do right now is sit tight. Don't overpay your student loan, and if you've spare cash put it in the highest interest savings account you can as loans are currently interest free.

"Then, come September, if you can't earn more in interest than the loan costs, use the cash to repay the loan."

Similar advice was offered by Tim Moss, head of loans at moneysupermarket.com, who emphasised that student loans are still "phenomenally cheap" and that even if the rates went up to five per cent, they would still remain of the best ways to borrow money in the UK.

Those hoping to attend university may be hoping the student loans system shows no repeat of the crisis last year, where students faced delays in getting their advances, after the Student Loans Company took over the processing of all England's student applications for grants and loans for the academic year 2009-10 from local authorities.

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