Ministers have intervened to reduce a sharp rise in interest rates charged on student loans, after the recent increase in inflation which meant rates would treble for many graduates by the autumn.
The Department for Education said the maximum rate from September is to be fixed at 7.3% rather than the 12% it would have reached by September, based on earlier inflation figures plus 3%.
The DfE said the change meant the accumulated interest of a borrower in England and Wales with a student loan balance of £45,000 would fall by about £180 a month compared with 12% interest rates.
Capping the maximum rate will mainly benefit the wealthiest graduates, according to the Institute for Fiscal Studies (IFS), because they are more likely to repay their entire loan off within 30 years of graduation. Other graduates have any outstanding balance wiped after 30 years.
The maximum interest rate is currently charged on loans to graduates making more than £49,000 a year, but the DfE’s change means all graduates will be charged the same 7.3% – which is a sharp rise from the current 1.5% charged on the loans of those earning £27,000 or less.
Michelle Donelan, the universities minister for England, said: “I want to provide reassurance that this does not change the monthly repayment amount for borrowers, and we have brought forward this announcement to provide greater clarity and peace of mind for graduates.”
Monthly student loan repayments are calculated by income rather than interest rates or amount borrowed. Graduates pay 9% of their income above a repayment threshold of £27,295 a year.
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Ben Waltmann of the IFS said: “We said in April that current policy on student loan interest rates was deeply flawed and would lead to an interest rate rollercoaster for graduates. It is great to see that as we suggested, the government has decided to take action to avoid the rollercoaster.
“However, for most graduates this announcement will have little or no effect on their repayments. Most of those with undergraduate loans will likely never pay off their loans in full, so the interest rate never affects their repayments.”
But Larissa Kennedy, the National Union of Students UK president, said that the new rates would still be “cruelly high” for many graduates.
“Ministers should be prioritising providing urgent cost of living support here and now. We’re hearing from students who can’t even afford to continue getting the bus,” she said.