Normally interest increases in line with inflation, but the current 9% rate would have seen student loan rates rise to 12% while the base rate is only 1.25%.
A rise in the rate of RPI due to global economic pressures meant student loan borrowers faced a 12% interest rate in September and the government has capped interest rates to a maximum of 7.3% to protect graduates.
Confirmation on interest rates is usually made in August, but the government has taken unprecedented steps to bring the decision forward, based on predicted rates, to provide reassurance for student loan borrowers on Plan 2 (undergraduate) and Plan 3 (Postgraduate) loans.
This means a borrower with a student loan balance of £45,000 would reduce their accumulating interest by around £180 per month compared to 12% interest rates. This is on the total value of the loan, as monthly repayments do not change.
Monthly student loan repayments are calculated by income rather than interest rates or the amount borrowed. Unlike for commercials loans, repayments will stop for any borrowers who earn below the relevant repayment threshold.
Workers repay 9% of their income over the repayment threshold, which is currently £27,295 a year, £2,274 a month or £524 a week in the UK.
|
Income each year before tax |
Monthly income before tax |
Approximate monthly repayment |
|
£27,295 |
£2,274 |
£0 |
|
£28,000 |
£2,333 |
£5 |
|
£29,500 |
£2,458 |
£16 |
|
£31,000 |
£2,583 |
£27 |
|
£33,000 |
£2,750 |
£42 |
Higher and further education minister Michelle Donelan said: ‘The government has always been clear that where it can help with rising prices we will, and I will always strive for a fair deal for students, which is why we have reduced the interest rate on student loans down from an expected 12%.
‘I want to provide reassurance that this does not change the monthly repayment amount for borrowers, and we have brought forward this announcement to provide greater clarity and peace of mind for graduates at this time.
‘For those starting higher education in September 2023 and any students considering that next step at the moment, we have cut future interest rates so that no new graduate will ever again have to pay back more than they have borrowed in real terms.’
For future borrowers, student finance will be put on a more sustainable footing. As announced in February, interest rates will be reduced so from 2023/24, new graduates will not, in real terms, repay more than they borrow.
HMRC collects student loan repayments from employers through the tax system. Self-employed workers settle loan payments through self-assessment tax returns.
