This House of Commons briefing paper answers frequently asked questions on student loan interest rates.Jump to full report >>
In September 2012 the Government made significant changes to the student finance system which included: allowing universities to raise their fees to £9,000 per year, raising the repayment threshold on student loan repayments to £21,000 and introducing a new variable tiered rate of interest on student loans.
At the time the changes were introduced the main focus of debate was on the increased level of tuition fees – very little was said about the new interest rate system.
Under the new system the interest charged on loans varies over the life of the loan – while studying the interest rate added is RPI + 3%, when a student graduates and is earning under the income threshold the interest rate falls to RPI and when a student is earning over the threshold the interest rate starts at RPI and rises to RPI + 3% when a graduate is earning over £41,000 per year. The intention of the scheme was to make repayments more progressive so that graduates earning more would repay more. The system was criticised by the Institute for Fiscal Studies for being complicated.
Since the introduction of the scheme the Government has made several more significant changes to the student finance system, such as the abolition of maintenance grants, which have moved student funding increasingly away from non-repayable grants and bursaries towards repayable loans. These changes have increased the amount of debt accrued by students.
The first large cohort of borrowers who took out loans under the new system became liable to repay these in April 2016. Since then debate has increased about the interest charged on loans. Additionally in April 2017 it was announced that the interest rate on loans for 2017/18 would be 6.1%. These factors have escalated debate around the interest rate on student loans – particularly around the rationale for the high levels of interest on student loans in a time of generally low interest rates.
In September 2017 there was speculation in the media that the interest rates on loans might be cut and on 12 September 2017 the Chancellor of the Exchequer gave evidence to a House of Lords Select Committee in which he said that the Government were looking into student funding and interest rates on student loans.
Nothing further has been announced on interest rates but on 4 October 2017 the Prime Minister announced a major review of university funding and student finance. The main impact on loans is the increase to the repayment thresholds. Under variable interest rates this effectively reduced the interest rate for everyone earning above the ol lower thresholds (£21,000) and below the new upper thresholds (£45,000).
Commons Briefing papers CBP-8089
Authors: Susan Hubble; Paul Bolton