Can someone please explain

djhworld

...To me the concept of repayment of the student loan?

I've just finsihed my first year of Uni and am in constant debate with friends and family about the student loan.

Some people say that when it comes to repaying the loan, you pay interest of around 2.6% on it, but I always thought the loan was interest free?

Others say the interest raises with inflation or something or other, but I have no idea what this means.

Anyone care to shed some light?

robhammond

Basically the loan is interest free - relative to the market price index!

I'm no economics expert but inflation is defined as "A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services."

In reality yes you pay 2.6%, although you should recieve a minimum 2.6% payrise as well - so if your income rises by 2.6% & your expenditure (including loans) does in relative terms your loan is 0% as there is no commercial rate added on top of it!

Confused as to why they bother?? I am!!

kar

When you recieve your statement in August you wont feel like it's 0% with the interest stated each month.

It rises with inflation (it's been 3.something percent this year) but is going down to 2.something next year.

Definately not 0% (in 'real' terms maybe but there IS interest going on every month) saying that gives you a false picture of what's going on - no it is not like having a 0% CC.

Everest

The short answer is that interest is charged on your outstanding student loan. The longer answer explains exactly what this interest represents.

Inflation as robhammond mentioned is the gradual increase in prices of goods. The effect of inflation is that the value of money goes down ie as the price of a mars bar goes steadily up each year the number of mars bars £1 will buy you steadily goes down. The same is true of the money you borrow from the student loans company (slc). The spending power of £1,000 you borrow in your first year of uni is eroded by inflation, ie that £1,000 would buy you fewer mars bars in three/four years time when you graduate than when you originally borrowed and spent the money. When borrowing is at 0% therefore (see some credit card balance transfers) the money you pay back is worth less in real terms than when you borrowed it: that which you pay back has less value than what you borrowed as it will purchase less as the price of goods increase.

To ensure that you pay back the same value to the slc as you borrowed, you are charged interest at the rate of inflation. That means that what you owe to the slc is not devalued by inflation. While the quantum of debt increases, the value of what you owe remains the same - effect on you is 2-3% interest but 0% in real terms.

Long winded but I hope that is a decent explanation.