Every September the Student Loan Company announces the interest rate that it will charge on outstanding loans for the upcoming academic year; unfortunately the news isn’t good. Find out how much interest you’ll be paying on your student borrowing.
Unlike other forms of borrowing you have little say in the rate of interest you pay on your student loan. Rates are set for the forthcoming student year each September and are related to the inflation figures from the current Retail Price Index published the previous March.
While your student loan will have been interest free last year (with some actually earning interest on their repayments!), things aren’t so rosy for the 2010/2011 academic year.
The most recent change to RPI change in March 2010 saw a jump from -0.4% to 4.4%. This means that the rate of interest applied to student loans are set to go up this year as well; just how much will depend on when you took the loan out.
Pre-1998 student loans
If you took out a student loan before 1998 and are still making repayments then the rate of interest you will pay on your loan will have risen from -0.4% to 4.4% on the 1st of September 2010 in line with the increase in the RPI.
This interest rate is fixed by The Student Loan Company until September 2011 so regardless of any changes to other rates it will remain the same for the next 12 months.
Post- 1998 student loans
If you have a new type of student loan, taken out after 1998, then the rate of interest applied to your borrowing will have increased from 0% to 1.5% on 1st September.
Unlike the ‘old style’ loans this rate is not fixed and could change. This is because the rate of interest applied to your loan is the lower of:
- the previous March’s Retail Price Index (4.4% in March 2010)
- 1% above the Bank of England base rate - this currently sits at record low 0.5%
As the Bank of England base rate could increase over the next 12 months there is a chance that the interest rate on this type of student loan will also go up.
However regardless of any changes the rate cannot go above 4.4% this academic year as the RPI is fixed for this period.
Will the amount I pay change?
Regardless of the type of student loan you have, and the amount of interest you’re being charged, the amount you repay will remain the same. The Student Loans Company will continue to take 9% of any income you earn over the £15,000 a year threshold.
So nothing to worry about?
Well although the amount you repay each month will remain the same, the change in interest rates means that it will take longer to repay your loan. As the amount you are charged in interest is added on to your outstanding debt.
Last year was also the first time that the interest rate was set above RPI, and although the rates for 2010-2011 are either set at the RPI or lower this year, there is the chance that going forward it could be at a higher rate.
So should I overpay my student loan?
This really depends on whether you have other borrowing that costs more. Your student loan is likely to be one of, if not the cheapest loan that you can get so it makes sense to focus any spare cash you have elsewhere. This is particularly the case if you’re paying interest at a rate of 1.5% as you’re likely to make more of your money just by saving it in a high interest account.
Read this guide for more information to help you decide whether you should pay off your student loan early.
