By Eva Rodericks
In a closely guarded secret, interest on student loans is increasing from 5.4% to 5.6% from September 2020. Hidden information for most, given that it has barely been reported on, here is everything you need to know about the changes to your student loan.
What is happening?
This change will affect students on the Plan 2 Student Loan Scheme, these are students who started their undergraduate degree in or after September 2012 in England or Wales. The interest you will be charged will depend on your income once you graduate; if you meet the payback threshold, which is currently £26,575 but will be rising to £27,295 a year, you will pay back your loan with 2.6% interest. This is the same as the current RPI (retail price index).
If you earn above £27,295 you enter a sliding scale, where you are charged 2.6% plus up to 3% extra, with those earning above £49,130 paying back the maximum 3% addition, totalling a maximum interest rate of 5.6%. For example if you owe £60,000 worth of debt, you will pay a maximum of £3,360 worth of interest a year. If it was 5.4% you would have paid £3,240. Ultimately, the difference is very little. More controversially, the interest rate for Plan 1 loans (student loans taken out between 1998 and 2011) will remain at 1.1%, with the payback threshold at £19,390.
Why are the rates increasing?
A number of factors could be behind the rise in interest, but the most obvious appears to be the rise in the retail price index, which is a measure of the inflation rate – essentially how expensive the cost of living is. In March 2019 the RPI was 2.4% which rose to 2.6% in March 2020. In the following months, April and May 2020, the RPI dropped drastically due to the pandemic, but came too late to reduce the student loan interest. On top of the RPI students can be charged up to an extra 3%, as explained above. To sum it up, as the cost of living is increasing, so is the interest on student loans.
However, this is not the only factor. Since 2013, under the Conservative government, student loans have slowly been sold off to private companies, as the government was apparently set to lose millions over unpaid student loans. This decision by the government came under intense scrutiny, with the National Union of Students (NUS) calling it an ‘ugly move’. Significantly, this suggests that private companies have some power over the running of the student loan scheme, especially as the government is keen to make the loans desirable to private companies, so they can sell them off. Once sold off, students fall victim to companies whose main interest is profit, ultimately meaning they will be extracting as much money as possible from students. It cannot be ruled out that this privatization has played its part in these changes to the student loan interest rates.
Is this fair?
Students on the Plan 2 scheme will undoubtedly be frustrated at this increase, especially taking into account that students on the Plan 1 scheme will continue to pay off loans at 1.1% interest. Students who took out loans between 1998 and 2011 are on the Plan 1 scheme, where interest is charged based on either the RPI or Bank of England base rate, whichever is lowest, plus 1%. Not only that, Plan 2 students are paying/have paid up to triple the fees that many students on the Plan 1 scheme paid. Students on the Plan 2 scheme do not receive extra contact hours, or necessarily better quality teaching, so students on this scheme are left to wonder where their extra expenses are going.
Universities should break down exactly where student’s fees go – the open publication of this is transparent and would help students know if they are getting good value for money and understand the increase in interest.
Should students worry?
Realistically these changes will not make a massive change to student debt – you will still only pay back 9% of everything you earn over the £27,295 annual income threshold. The increase is almost unnoticeable, probably why it has been done so sneakily. Whilst the increase does seem unjust, students do not need to lose sleep over it. Unpaid student debt is written off in 30 years, and it is estimated by the government that two out of three loans will be written off anyway.
Graduate job prospects have plummeted in the current climate, so paying back loans will likely be slowed for a while. If you lose your job the payments will also be put on pause. In all likelihood, you will not notice the difference.