MSE News: Student loan interest rates to rise from September – what it means for you

MSE_Petar

Student loan interest rates will rise for many from September, the Government has confirmed. But this WON'T make a difference to your monthly repayments. Here's what you need to know.

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'Student loan interest rates to rise from September – what it means for you'

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Ed-1

My analysis of the current state of play:

Confirmation that the pre-2012 (plan 1) threshold for student loans is up 9% (March RPI figure) to £22,015 from April 2023, cutting repayments (student loans are the only loans where higher inflation and interest rates cuts repayments instead of raising them).

High inflation is transforming the student loans system (something needed to). It's unfortunate it's taking making everyone poorer to do it though. And it shouldn't be taking so long to fix. It should have been fixed at the earliest opportunity rather than drawn out and left to chance. What is interesting about how inflation's playing out though is that it complicates the policy question. The stated policy intention is for the new threshold announced in February that will apply to post-2023 (plan 5) loans to be higher than the threshold for plan 1 loans:

"The £25,000 repayment threshold ... is higher than the repayment thresholds for pre-2012 loans and postgraduate loans..."

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1057091/HE_reform_command-paper-web_version.pdf

But "the retail prices index (RPI), which is used to set rail fares and student loans repayments, is expected to hit 17.7%" over the next few months:

https://www.theguardian.com/business/2022/aug/03/inflation-will-soar-to-astronomical-levels-over-next-year-thinktank-warns

And if RPI is at least 13.6% in March 2023, the repayment threshold for plan 1 loans will overtake the new £25,000 threshold for plan 5 loans a whole 2 years before the latter threshold even comes into force! It won't even be that far off the post-2012 (plan 2) threshold which is frozen at £27,295 until April 2025.

It will be interesting to see if the government moves to raise that £25,000 threshold. The IFS predicted they might have to "take corrective action in a few years", but it's quite something that the reform's unravelling just a few months after it was announced (they won't hold down the plan 1 threshold instead as there's no point in increasing the repayments going to companies who've bought these loans off the government):

"Finally, there is no justification for nominal freezes at any time, but they are especially problematic at the moment. Because inflation is currently high and unpredictable, the repayment threshold may well be reduced by more (or less) than the government intended. This introduces an unnecessary element of uncertainty into the student loans system, and the government might well have to take corrective action in a few years. It would have been much better to reduce the repayment threshold to its intended value and then uprate it with the government’s preferred long-term indexing rule."

https://ifs.org.uk/uploads/BN341-Student-loans-reform-is-a-leap-into-the-unknown.pdf

"The government does not propose to change the repayment threshold for pre-2012 student loan borrowers ... which already increases annually in-line with RPI"

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1057091/HE_reform_command-paper-web_version.pdf

But if they do raise it to keep it higher than the plan 1 threshold, they won't have much room for maneuver between plan 1 and 2 thresholds. Of course, the simplest option is to merge all thresholds into one so repayments are the same across all loans but that's far too obvious for government to pursue isn't it!

This sums up the current state of play pretty well: "The student loans system is a “mess” that consecutive governments have tweaked “purely for short-term political gain”..."

https://www.thetimes.co.uk/article/student-loans-are-a-mess-says-former-blair-adviser-bh5zfcw2q

N.B.1 on current policy, the plan 2 threshold is due to rise with RPI from April 2025 onwards (so the first relevant RPI is March 2024) and the plan 5 threshold is due to rise with RPI from April 2027 onwards (so the first relevant RPI is March 2026). So the March 2023 RPI is the final opportunity to reduce the gap between plan 1 and plan 2 thresholds.

N.B.2 it matters which threshold is higher if you've got (or will have) loans under more than one plan (which you have if you study more than one course in the relevant time periods) as it changes which loan the repayments are first used towards.

N.B.3 interest rates on plan 5 loans (and plan 2/3) won't rise to the same levels as RPI even though they're linked to RPI as they'll be capped at "market rates" as they have been for 22/23 at 6.3% until December (March 2022's RPI was 9%).

N.B.4 It's going to take something dramatic like a government policy to cut VAT, an oil price crash, reversal of mortgage interest rate rises or ending the war in Ukraine to put RPI below 13.6% next March. Whether the government energy bill 'discount' is captured in the inflation stats (i.e. whether it counts as lowering the bill or as support to pay a higher bill) also makes a huge difference (the ONS are ruling on that on 31st August).
UPDATE 1: the energy discount WON'T lower inflation - https://www.ons.gov.uk/news/statementsandletters/energybillssupportschemeclassification
UPDATE 2: the energy price guarantee WILL lower inflation for 6 months from October 2022 (so in particular in March 2023) - https://www.ons.gov.uk/news/statementsandletters/classificationreviewoftheenergypriceguaranteeandenergybillreliefscheme

Blackcat29

I currently owe around £11.5K (part time study via open university so not as expensive). Assuming no change in my circumstances I will pay this back in another 10-15years (within 20 years of finishing my degree) so the interest rate does impact how much I will repay. Would I be better off trying to switch to a normal bank loan, though not sure I'll be able to qualify for a loan at the moment? The other option is I have lots of empty credit cards with 0% offers on, but nothing long enough for me not to have to switch a few times before it was all paid off.

Ed-1

Ed-1 said:

N.B.4 It's going to take something dramatic like a government policy to cut VAT, an oil price crash, reversal of mortgage interest rate rises or ending the war in Ukraine to put RPI below 13.6% next March. Whether the government energy bill 'discount' is captured in the inflation stats (i.e. whether it counts as lowering the bill or as support to pay a higher bill) also makes a huge difference (the ONS are ruling on that on 31st August).

UPDATE: the energy discount WON'T lower inflation - https://www.ons.gov.uk/news/statementsandletters/energybillssupportschemeclassification

Updated to reflect today's ONS decision that the energy discount won't lower headline inflation.

Ed-1

At this rate, the plan 1 threshold won't just overtake the plan 5 threshold but if RPI hit 24% next March, it would even overtake the plan 2 threshold! It probably won't as wholesale gas prices may not sustain their ultra-high levels (which determine the January price cap) and the government may introduce interventions that do lower inflation slightly, but it may come close.

https://www.google.com/amp/s/www.dailymail.co.uk/news/article-11163573/amp/Energy-giants-set-rake-17BN-EXTRA-profits-two-years-Brits-face-22-inflation.html

Ed-1

Ed-1 said:

N.B.4 It's going to take something dramatic like a government policy to cut VAT, an oil price crash, reversal of mortgage interest rate rises or ending the war in Ukraine to put RPI below 13.6% next March. Whether the government energy bill 'discount' is captured in the inflation stats (i.e. whether it counts as lowering the bill or as support to pay a higher bill) also makes a huge difference (the ONS are ruling on that on 31st August).

UPDATE 1: the energy discount WON'T lower inflation - https://www.ons.gov.uk/news/statementsandletters/energybillssupportschemeclassification
UPDATE 2: the energy price guarantee WILL lower inflation for 6 months from October 2022 (so in particular in March 2023) - https://www.ons.gov.uk/news/statementsandletters/classificationreviewoftheenergypriceguaranteeandenergybillreliefscheme

Updated to reflect today's ONS decision that the energy price guarantee will lower headline inflation for 6 months from October 2022. This means inflation in March 2023 will be around 5 percentage points lower than it otherwise would have been. But as a consequence it also means inflation in March 2024 will be around 5 percentage points higher. The government may look to prolong the freeze on the plan 2 threshold for a further year as a result.

Ed-1

Further update following Autumn Statement:

The Energy Price Guarantee will limit the rise in inflation to around 1 percentage point for 12 months from April 2023 so in March 2024 RPI won't be as high as it could have been (depending on where the Ofgem cap would be set)