Student Loan Interest Rate Discussion

Former_MSE_Natasha

From Martin....

Government! Keep your promise and SHRINK student loans!

Everyone with a student loan should see it reduced from September, as inflation’s now negative. Yet even when pushed hard the Government won’t confirm this'll happen.

Here's a quick Q&A on all the details.

Q. Why should loans shrink?

A. They’re set at the rate of inflation. Specifically, every September it changes based on March’s Retail Prices Index (RPI) rate. Today, that was revealed as MINUS 0.4% so, from September, student loans should be reduced by 0.4% over the year.

Q. Why are they at the rate of inflation?

A. It's a binding principle that there should never be a “real cost” to student loans. Inflation is the rate at which prices rise. Thus, borrow £1,000 which’d buy ten shopping trips worth of goods, and you’ll only pay back whatever it then costs to buy the same ten shopping trollies, so while the actual price changes, your purchasing power isn’t diminished.

Q. What's the current rate?





A. It depends on when you started uni.

• Pre-98 starters. These loans are at 3.8%, the RPI figure from March 2008.

• Post-98 starters. Here the current rate's 1.5%, as there was a special clause invoked for the first time this year saying if a basket of banks' interest rates, plus 1%, is lower than inflation, it should drop to that, and it has.

Q. What's the government said?

A. On 17 March, speaking on pre-98 loans Higher Education Minister David Lammy said “The interest rate for the 2009/10 year will reflect the RPI… consistent application means… over the lifetime of the loan, the borrower will repay in real terms no more than was borrowed.” (see full text).

Yet speaking today, the Government's still saying it can't confirm September's rate; but my suspicion is expect an announcement in the next fortnight.

The only get out clause seems to be that the phrasing “over the lifetime” means it could say that because the special clause meant some loan holders paid less than inflation this year, they needn’t drop the rate in September. Yet odds are all student loan holders will see their loans shrink from September. If not, this site will launch a campaign (and we know the Government department is reading this).

Related Guides: Should I Repay My Student Loan?, Student MoneySaving, How Interest Rates Work

Update Note by Martin 9pm 21 April. If you're wondering what the get out clause here is, as many think below. The only route I can see is that for post-98 loans it will argue the "over the lifetime of the loan" clause means it needn't match RPI for post-98 studets and as its been lower this year than RPI due to the special clause so it doesn't need to be negative next year. Yet i still think overall it will stick with the -0.4%. As I say though, we will resource a campaign if it doesn't live up to it (and i will try and do it in my media outlets)

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Lokolo

Jolly good to know.

atypical

Surely the decision would have been made before now, why the wait for confirmation?

I look forward to seeing -0.4% on my next student loan letter

Nixxx

I really hope that they do stand by their motto that we pay back what we borrow in "real terms", but i don't see it happening.

*ditz*

I don't see it happening. In fact, the more I read the more I think that post-1998 are going to end up stuck with 1.5% for the whole of the coming year

stephen163

*ditz* wrote: »

I don't see it happening. In fact, the more I read the more I think that post-1998 are going to end up stuck with 1.5% for the whole of the coming year

Why is that?

There was a 'special clause' that brought it down to 1.5% - the interest can't be any more than 1% above the base rate. But now RPI has gone negative, surely the lower of the measures should now be taken?.

*ditz*

stephen163 wrote: »

Why is that?

There was a 'special clause' that brought it down to 1.5% - the interest can't be any more than 1% below the base rate. But now RPI has gone negative, surely the lower of the measures should now be taken?.

The article on the BBC website. I think they're going to say that as they lowered it to 1.5% in March, we're not paying the rate of inflation for the previous year and therefore in order to repay at market value they are keeping it at this rate for the coming year.

http://news.bbc.co.uk/1/hi/business/8010774.stm

It's this line which bothers me: "Interest rates on loans taken out after 1998 are calculated in a different way, with greater flexibility in how they are worked out. "

stephen163

Right, I guess we'll just have to wait and see.

silvercar

The article on the BBC website. I think they're going to say that as they lowered it to 1.5% in March, we're not paying the rate of inflation for the previous year and therefore in order to repay at market value they are keeping it at this rate for the coming year.

But for new students, they haven't benefitted by lower rates til now, so should have a rate no higher than inflation.

pavlovs_dog

i'll be watching this with interest

*ditz*

stephen163 wrote: »

Right, I guess we'll just have to wait and see.

I shall keep my fingers crossed! Sorry I'm being pessimistic. I really hope it works out!