Find out what rate of interest you'll pay on your student loan for the 2009/10 academic year, and whether you'll benefit from low interest rates.
The interest rate applied to student loans is set each September based on inflation figures from the previous March’s RPI (Retail Price Index). To date, all student loan interest rates have been equivalent to or less than this figure.
As March 2009’s RPI stood at -0.4%, it should follow that the student loan interest rate for the next academic year will be set to a figure that is equivalent to or less than -0.4%. This would mean your student loan balance would reduce over the coming year, regardless of whether you made repayments or not.
However, this year the Government have decided to set a new precedent. Instead of reducing the interest rate to the expected -0.4%, they have set it at the slightly higher 0% for all those who took out a loan after 1998. This means that for the first time the rate will be more than the RPI. For pre-1998 starters however, whose rate is always linked solely to the RPI, the interest rate will indeed reduce to -0.4%.
How will this affect me if...?
I took out a student loan pre-1998
If you took out a student loan before 1998 and are still making repayments on it, you will benefit from the economy’s deflation and see your interest rate reduced to -0.4% for the coming academic year (2009/10). As pre-1998 loans are always based on the previous March’s RPI, you will effectively see your student loan balance reduced over the year.
Nevertheless, you will still have to pay 9% of your wages in repayments to the Student Loans Company if you earn over £15,000. This threshold is set to stay the same for the next 12 months.
I took out a student loan post-1998
If you took out a student loan after 1998, the interest rate on your loan will reduce to 0% this academic year (2009/10). Therefore you will accrue no interest on your outstanding balance. However you will still have to pay 9% of your earnings to the Student Loans Company if you earn more than £15,000.
According to The Student Loans Company, interest rates on post-1998 loans have been reduced to zero because it would be difficult to justify to taxpayers a situation where loans taken out in 2009/10 had balances that were immediately reduced.
What’s the catch?
Although post-1998 starters will effectively be paying no interest this year, the decision to base the interest rate above the RPI sets a dangerous precedent for the future.
As this is the first time the interest rate has not been set in line with the RPI, it opens up the possibility that future loans could end up costing a lot more. The RPI is likely to rise in the coming years when the economy regains its footing, so student loan interest rates are likely to be set at a much higher rate than the RPI in the future.
