Student loan calculator tells you exactly how much interest you’ll pay starting in September
Soaring inflation means students and graduates could see their debts rise rapidly this year – find out how much you plan to pay off with our calculator below.
English and Welsh graduates who have taken out student loans since 2012 can expect a ‘roller coaster ride’ when it comes to interest rates, according to new analysis.
This means that students have to pay higher interest rates on their loans than homeowners paying off mortgages.
The Institute for Fiscal Studies (IFS) has calculated that due to current rates of RPI inflation, the maximum interest rate on loans – paid by those earning £49,130 or more – will rise from current rates of 4.5% at an “appetizing” 12% for six months.
Interest rates for low earners are expected to rise from 1.5% to 9%, the IFS said.
They added that this means a recent high-income graduate with a typical loan balance of £50,000 would incur £3,000 in interest over six months, a higher amount than a graduate earning three times the median salary of recent graduates would generally pay.
The IFS said the maximum student loan rate was then expected to fall to around 7% in March 2023, fluctuating 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 IFS said.
“These wild swings in interest rates will result from the combination of high inflation and an interest rate cap that takes six months to come into effect,” they added.
They said without the rate cap, maximum rates would be 12% in the 2022/23 academic year, rising to around 13% in 2023/24.
They said an “interest rate roller coaster” would cause problems, as the interest rate cap disadvantages students with declining debt balances.
It could also deter students from going to college or push graduates to repay their loans when there would be no financial benefit to them.
The “tempting” increases are linked to the retail price index and a rise in the cost of living.
For borrowers starting with the 2012 college-entry cohort, student loan interest is normally tied to the retail price index (RPI).
Interest rates on student loans are generally charged between the RPI inflation rate and the RPI inflation rate plus 3%.
Is 12% interest on student loans fair? Let us know your thoughts below
But there is a lag between the RPI inflation rate and the interest rates on student loans, which IFS calculates means that the current high inflation rates will translate into higher rates of inflation. interest on student loans for 2022/23.
“This high value implies a meteoric increase in interest rates on student loans between 9% and 12%,” said the IFS.
“That’s not only far more than average mortgage rates, but also more than many types of unsecured credit. Student borrowers might legitimately ask why the government is charging them higher interest rates than those offered by lenders. private,” they added.
Student loan interest rates are not expected to exceed market interest rates, but lags between when the market interest rate is measured and DfE action mean that between September 2022 and February 2023, students will pay uncapped rates.
The situation is likely to disadvantage the best-paid graduates. Borrowers whose debt decreases over time will be charged more than those whose debt increases.
The IFS said this would lead to an “unfortunate redistribution” among graduates.
Ben Waltmann, senior research economist at IFS, said: “Unless the government changes the way interest on student loans is determined, there will be wild swings in the interest rate over the next three coming years.”
“The maximum rate will reach a breathtaking 12% between September 2022 and February 2023 and a minimum of around zero between September 2024 and March 2025.
“There is no good economic reason for this. Interest rates on student loans should be low and stable, reflecting the government’s cost of borrowing.
“The government must urgently adjust the way the interest rate cap works to avoid a big spike in September.”
University and College Union general secretary Jo Grady said: “It simply cannot be fair to put students in debt with tens of thousands of pounds in debt and then subject them to the vagaries of volatility. markets and soaring interest rates.”
“Today’s news will leave those already repaying student loans bracing themselves for increased debt payments during a cost of living crisis and leave others wondering if a college education is really worth it. On every level, this is a political disaster.”
A spokesman for the Department for Education said: “Unlike commercial loans, student loans are protected in several ways.
“Monthly student loan repayments are tied to income, not interest rates or amounts borrowed, and borrowers with income below the relevant repayment threshold do not repay at all.”