Is the % increase on EXISTING Student loans balances? September 2022

Topher

We are debating repaying in full my husbands outstanding balance on his student loan. This has cropped up several times over the years when we have regularly reviewed our finances. Since qualifying my husband has gradually increased his income and is now earning over 50K. So far, in terms of managing our money it hasn’t been worth him paying the outstanding balance in full in one payment as the interest rate has been low enough to make it a better management of our money to pay it back in regular monthly payments. 
I am asking if the newly announced increase in interest rates on student loans will affect the outstanding balance on the student debt we incurred a few years ago or will it just apply to agreements made on new loans to be taken out by new students this September (2022)? 
If we now have an historic loan that is protected from the increase i.e. still incurs the lower rate of interest as agreed initially, we will carry on with the gradual repayment scheme. If our existing loan is subject to the same 12% rate of interest i.e. on ALL loans pre existing or new that is suggested by the headlines, it will make sense, for our own financial management, to pay our debt off before September.
Just to be clear, I know the monthly rate won’t increase but the length of time the repayments continue to be deducted from income will; I’m looking at the overview of how much in total of our money earned across our working lifetimes stays in our pockets and how much of it in total goes into the Govt. coffers. 

DrEskimo

My understanding of plan 2 student loans is that the interest rate is dependent on your income, and RPI levels.


So as your husband is earning over £49,130, the rate will increase to RPI + 3%, with the IFS reporting RPI at 9%, that will mean 12% for the 2022/23 academic year, with a forecast of this rising again to 13% for 2023/24.

Topher

DrEskimo said:

My understanding of plan 2 student loans is that the interest rate is dependent on your income, and RPI levels.


So as your husband is earning over £49,130, the rate will increase to RPI + 3%, with the IFS reporting RPI at 9%, that will mean 12% for the 2022/23 academic year, with a forecast of this rising again to 13% for 2023/24.

Thank you, so as I understand your response (I’ve also seen that chart on MSE ) the interest rate pertaining to the outstanding balance my husband’s loan WILL increase to 12% as of the academic year 2022/2023

DrEskimo

Topher said:

DrEskimo said:

My understanding of plan 2 student loans is that the interest rate is dependent on your income, and RPI levels.


So as your husband is earning over £49,130, the rate will increase to RPI + 3%, with the IFS reporting RPI at 9%, that will mean 12% for the 2022/23 academic year, with a forecast of this rising again to 13% for 2023/24.

Thank you, so as I understand your response (I’ve also seen that chart on MSE ) the interest rate pertaining to the outstanding balance my husband’s loan WILL increase to 12% as of the academic year 2022/2023

Correct, although it is worth reading the IFS report I linked in detail. There is quite a lot more to it and importantly:

"While interest rates affect all borrowers’ loan balances, they only affect actual repayments for the typically high-earning graduates that will pay off their loans."

It sounds as though your husband falls into this category and will be predicted to pay off the loan in full?

Topher

DrEskimo said:

Thank you, so as I understand your response (I’ve also seen that chart on MSE ) the interest rate pertaining to the outstanding balance my husband’s loan WILL increase to 12% as of the academic year 2022/2023

Correct, although it is worth reading the IFS report I linked in detail. There is quite a lot more to it and importantly:

"While interest rates affect all borrowers’ loan balances, they only affect actual repayments for the typically high-earning graduates that will pay off their loans."

It sounds as though your husband falls into this category and will be predicted to pay off the loan in full?

Thank you again for the added detail. Across the morning I have gathered that his first loan/s fits into the pre 2011 loan period and is therefore Loan plan 1. The second wasn’t a loan as he was sponsored. While this is good for the current prediction of the interest rate to be applied, if the RPI goes up, it affects his interest as (& I think this is correct) his loan was of the type that is repaid at the interest rate + 1% and who knows what’s going to happen to the interest rates? (I’m speaking as someone who took out a mortgage in 1983 then had to watch the mortgage repayments rise and rise, adjusted almost monthly up to 13% and I’m not sure if 15% was implicated). 

DrEskimo

Topher said:

DrEskimo said:

Thank you, so as I understand your response (I’ve also seen that chart on MSE ) the interest rate pertaining to the outstanding balance my husband’s loan WILL increase to 12% as of the academic year 2022/2023

Correct, although it is worth reading the IFS report I linked in detail. There is quite a lot more to it and importantly:

"While interest rates affect all borrowers’ loan balances, they only affect actual repayments for the typically high-earning graduates that will pay off their loans."

It sounds as though your husband falls into this category and will be predicted to pay off the loan in full?

Thank you again for the added detail. Across the morning I have gathered that his first loan/s fits into the pre 2011 loan period and is therefore Loan plan 1. The second wasn’t a loan as he was sponsored. While this is good for the current prediction of the interest rate to be applied, if the RPI goes up, it affects his interest as (& I think this is correct) his loan was of the type that is repaid at the interest rate + 1% and who knows what’s going to happen to the interest rates? (I’m speaking as someone who took out a mortgage in 1983 then had to watch the mortgage repayments rise and rise, adjusted almost monthly up to 13% and I’m not sure if 15% was implicated). 

Ah OK. Plan 1 student loans are very different. I am just towards the end of my plan 1 student loan and only plan to overpay soon as I am approaching the last few thousand.

Plan 1 student loans are capped at the lowest of either:

• Bank of England Interest rate +1%
• RPI

So the interest will never exceed the RPI measure of inflation.
It's also likely his loan amount is considerably lower than those on plan 2 due to the increases in student fees, so possible he is close to paying the full amount in the next few years?

Whilst no one can know, it seems unlikely that interest rates will rise to anywhere close to double figures in the near future.

Topher

DrEskimo said:

Topher said:

Ah OK. Plan 1 student loans are very different. I am just towards the end of my plan 1 student loan and only plan to overpay soon as I am approaching the last few thousand.

Plan 1 student loans are capped at the lowest of either:

• Bank of England Interest rate +1%
• RPI

So the interest will never exceed the RPI measure of inflation.
It's also likely his loan amount is considerably lower than those on plan 2 due to the increases in student fees, so possible he is close to paying the full amount in the next few years?

Whilst no one can know, it seems unlikely that interest rates will rise to anywhere close to double figures in the near future.

Not sure how close to paying off he is, something like £17,000 outstanding so a few years to go yet. What do ou consider to be the last few thousand (ballpark)?

DrEskimo

Topher said:

DrEskimo said:

Topher said:

Ah OK. Plan 1 student loans are very different. I am just towards the end of my plan 1 student loan and only plan to overpay soon as I am approaching the last few thousand.

Plan 1 student loans are capped at the lowest of either:

• Bank of England Interest rate +1%
• RPI

So the interest will never exceed the RPI measure of inflation.
It's also likely his loan amount is considerably lower than those on plan 2 due to the increases in student fees, so possible he is close to paying the full amount in the next few years?

Whilst no one can know, it seems unlikely that interest rates will rise to anywhere close to double figures in the near future.

Not sure how close to paying off he is, something like £17,000 outstanding so a few years to go yet. What do ou consider to be the last few thousand (ballpark)?

I have around £10k left, but due to my income I pay around £5k a year off currently, so I'll look to shift to either a direct debit payment next year, or far more likely I will just pay off the remainder in full.

It's worth moving to at least direct debit once you are within 6-12months of repayment to ensure you do not overpay.